CEOs With Massive Stakes: Betting With The House

Includes: AFL, CLH, MCHP, STJ
by: Alan Brochstein, CFA

I spend a lot of my time examining alignment of management with the interests of shareholders in my work with Management CV. As a generalist, I am exposed to lots of different companies and industries, but understanding management motivation is a common thread across every company I examine. Alignment comes in many forms, with incentives and compensation structures playing a key role. At the end of the day, though, nothing says "I am on your side" more than a massive position by the CEO in the stock.

Today, I want to share a list of companies that have impressed me in many ways, but all with the binding characteristic of CEOs who hold shares currently worth more than $100mm. My list certainly isn't meant to be exhaustive, and perhaps a much smaller stake still justifies attention. In any event, the companies I will discuss are excellent in many ways, innovative and leaders in their respective industries.

First up is St. Jude Medical's (NYSE:STJ) Dan Stark. He came to the company in 1996 when it acquired Daig Corporation, where he was CEO. His salary of $995K is a bargain compared with his peers, and he continues to build his massive equity stake with annual options awards that account for over 70% of his total compensation. So, what's in his wallet? 6.5mm shares ($247mm) plus options on another 1.3mm that are exercisable and another 1.2mm that haven't yet vested. As if that's not enough, the CFO, John Heinmiller, had a beneficial ownership as of March 15, in excess of 1mm shares. It's no wonder that STJ has so greatly outperformed Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX) over the past decade, rising 120% while the others declined 27% and 40% respectively. As much as I would like to credit his massive stake, though, it's really his passion that drives him. STJ is a member of my Top 20 model Portfolio.

Next up is Microchip's (NASDAQ:MCHP) Steve Sanghi. Over the past decade, his stock has increased 38% while the Philadelphia Stock Exchange Semiconductor index has declined 36%. Sanghi's salary of $551K for Fiscal 2011 looks like a bargain compared with other Technology CEOs. So, what's in his wallet? 4.6mm shares as of May 20, ($150mm) plus another 1.365mm exercisable options, all in the money. So, while his salary and even total compensation is on the low side compared with peers, keep in mind that the fat dividend (yielding more than 4%) juices his take-home pay.

Moving to Financials, let's go to Aflac (NYSE:AFL), where Don Amos owns about 5.4mm shares ($173mm) plus 3.7mm in exercisable options (some underwater). I just recently added AFL to my watchlist and confess to not knowing it as well as the other stocks I am mentioning. His salary is a bit higher than the others I am discussing ($1.38mm), but 64% of his total compensation of $16mm was in stock (mainly options). While this decade has been tough for Financials (the SPDR XLF is down 56%), AFL has still managed to gain 14% over the past ten years. If you want to learn more, I recommend a recent article by fellow Seeking Alpha contributor Thomas Lott, who did a great job describing the recent challenges of the company.

My last company is an Industrial that I have followed closely for a couple of years, Clean Harbors (NYSE:CLH). I instantly took a liking to CEO Alan McKim, who founded the company in 1980 and has continued to aggressively expand into new markets via acquisitions while reinvesting internally as well. His 5mm shares roughly are valued at over $250mm. His salary increased to $750K in 2010. Historically he declined his bonus, turning down a $850K payment in 2008, due to the economic downturn as well as in previous years. In 2009, he earned $285K but accepted only $95K. In 2010, he accepted it ($760K). For total compensation of $1.511mm (including $1032 in perqs!), which is less than he paid his CFO, shareholders sure got a bargain. Over the past ten years, the stock has appreciated 46-fold. While McKim has been trimming his position marginally, he is on top of his game and certainly not resting on his laurels. While many CEOs pursue acquisitions at any price as they seek to build their empires on other people's money, McKim sure acted like a shareholder when he walked away from an acquisition earlier this year rather than chase the target.

So, these are just four examples of companies I am following where I feel like the CEO has not only a massive stake but also continues to add a lot of value for fellow shareholders. Quite simply, these guys beat the hired hands who run their competitors. In the uncertain times ahead, it might make sense to bet with house.

Disclosure: Long STJ in a model managed by Invest By Model