Executive pay: How South Florida CEOs stack up
CEO compensation in South Florida, and nationwide, is up. So is stockholders’ sensitivity to it: With ‘say on pay’ votes, shareholders increasingly show their dissatisfaction with top executives’ performances.
06/22/2014 5:00 PM
09/12/2014 11:53 AM
While most public companies based in South Florida paid their chief executive officers more in 2013 than in 2012, few have raised pay for the CEO position more than Boca Raton-based Office Depot.
Not many CEOs face challenges greater than those facing Office Depot CEO Roland C. Smith, whose total 2013 annual compensation was $19.6 million, making him the highest-paid CEO in Miami-Dade, Broward and Palm Beach counties. His annual pay is about three times greater than the $6.8 million that a recent predecessor, former Office Depot CEO Neil Austrian, earned in 2011. Smith is overseeing the integration of Office Depot and its former rival OfficeMax, which merged last year on Nov. 5 to form a combined company with 60,000 employees and annual sales of about $17 billion.
Smith most recently was president and CEO of Delhaize America, which generates $18 billion of annual revenue through its U.S. supermarket chains Food Lion and Hannaford.
Office Depot offered ample CEO compensation to recruit Smith, who joined the company in November shortly after its merger with OfficeMax. Smith brings broad managerial experience to Office Depot. According to the company’s website, Smith formerly served as president and chief executive officer of Wendy’s/Arby’s Group, American Golf Corporation, National Golf Properties, and AMF Bowling Worldwide. He also has held senior management positions with KFC Corp., Pepsi Cola International, Procter & Gamble and Schering-Plough.
In addition to trebling CEO pay, Office Depot also generated a fat 58.7 percent return last year on its shareholders’ investment in the office supply retailer.
“Our future depends on the success of our integration process and the leadership of our post-merger management team,” led by Smith, who was appointed CEO of the company shortly after the merger, Office Depot said in a proxy statement issued in advance of its annual shareholders meeting on April 24 this year. “We urge shareholders to consider our 2013 compensation decisions in the context of our transformative merger and its associated challenges.”
Most but not all shareholders of Office Depot are happy with the company’s executive compensation. In a so-called “say on pay” vote, shareholders cast 69.6 percent of their votes in favor of the executive compensation at Office Depot.
The sweeping reform of the financial services industry known as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires all public companies to hold a nonbinding say on pay vote on executive compensation at annual shareholder meetings every year or every three years, depending on the frequency that shareholders approve.
It’s understandable why some Office Depot shareholders protested the compensation of executives who run the company at its annual shareholders meeting. Office Depot’s stock price, which closed at $5.65 on the day of the OfficeMax merger, had dropped to $4.24 by the day of the company's annual meeting, when shareholders cast their say on pay votes.
A survey of say on pay votes at South Florida-based companies by Global Governance Advisors (GGA) shows that their executive compensation approval rates generally have declined since companies began holding these votes in 2011.
“Pay levels have increased and the performance hasn’t necessarily been all that much better. So people are just being more vocal” about executive compensation, said Luis H. Navas, vice chairman of GGA. In South Florida, “You’ve got a higher incidence of companies whose say on pay votes are dropping, so they’re getting more criticism about their compensation programs.”
This year, for example, “Carnival and MasTec barely passed their say on pay votes,” he said.
Earlier this year, shareholders of Miami-based cruise line company Carnival cast just 58.1 percent of their say on pay votes in favor of executive compensation, down from 93.1 percent last year, even though the company’s chairman took a big pay cut last year. The company has reeled from several negative high-profile incidents in recent years, including the 2012 Costa Concordia shipwreck that killed 32 and the February 2013 Carnival Triumph fire that left thousands adrift for five days without plumbing or air conditioning.
Carnival’s stock price closed at $37.08 on April 17, the day of its annual shareholders meeting, down about 7 percent from $39.66 on the last day of 2013. The compensation of Carnival chairman and former CEO Micky Arison, who owns the Miami Heat, collected compensation totaling $4.8 million last year, down 35 percent from $6.49 million in 2012.
The payback for investing in Carnival also went south in 2013. Carnival shareholders last year endured a negative total return (including dividend income) of -2.65 percent on their investment in the company.
MasTec shareholders fared better last year. Their total return on investment in 2013 was 31.25 percent. Nevertheless, shareholders of the Coral Gables-based specialty construction and engineering company this year cast just 57.9 percent of their votes in favor of its executive compensation program, down from 98 percent in 2011, the last time Mastec held a say on pay vote. Its highest-paid executive, CEO José R. Mas, collected $5.37 million in total compensation last year, up 1 percent from $5.31 million in 2012.
The payback on MasTec shareholders’ investment rose faster than CEO pay in 2013. MasTec’s stock price rose from $24.93 at the end of 2012 to $32.72 at the end of 2013, a 31.25 percent increase, and the stock price continued rising this year from January to May, closing at $38.38 on May 22, the day of its 2014 annual shareholders meeting.
But the stock has been trading closer to $30 since Mastec announced June 1 that it expects second-quarter financial results to be hurt because of “unexpected delays” in spending on wireless projects. The company estimated these delays will reduce second-quarter revenue in the communications segment of its business by $45 million to $50 million, compared with last year's second quarter. MasTec also announced “weaker-than-expected oil and gas segment results” in the second quarter.
No CEOs of public companies in South Florida ranked among the top 50 CEOs nationwide in total compensation. But many South Florida CEOs are highly paid relative to the size of their companies, Navas said.
For example, the 2013 total compensation of Office Depot CEO Smith and that of Wells Fargo CEO John G. Stumpf were nearly equal, even though the market capitalization of Wells Fargo (the number of shares of stock outstanding multiplied by the share price) is $272 billion, about 97 times more than Office Depot’s market capitalization of $2.804 billion.
Similarly, the 2013 total compensation of Stuart Miller, CEO of Miami-based homebuilder Lennar, and that of Robert A. Bradway, president and CEO of biotechnology company Amgen, were almost the same, even though the market capitalization of Amgen is $86.03 billion, about 11 times more than Lennar’s market capitalization of $7.508 billion.
Still, CEO pay in South Florida pales in comparison to the compensation of some of the entertainment and sport celebrities who live in Miami-Dade, Palm Beach or Broward counties. Professional golfer Tiger Woods, who resides in Jupiter Island, has annual earnings of $78 million. Miami Heat star LeBron James racked up $72.3 million including endorsements for the year ending fall 2013, reported Forbes magazine. Movie actor Dwayne Johnson, who has a home in Miami, made $46 million, while radio talk show host Rush Limbaugh of Palm Beach made $66 million, according to June 2013 calculations by Forbes.
Navas also said low executive compensation approval rates are common among shareholders of such family-controlled public companies as MasTec, which is controlled by the Mas family, and Carnival, which is controlled by the Arison family.
According to the annual 10-K report that Carnival filed this year with the U.S. Securities and Exchange Commission (SEC), “a small group of shareholders consisting of some members of the Arison family, including Micky Arison, owned 27 percent of the combined voting power of Carnival Corporation and [Carnival] plc,” at the beginning of 2014, and “depending upon the nature and extent of the shareholder vote, this group of shareholders may have the power to effectively control, or at least significantly influence, the outcome of certain shareholder votes and therefore the corporate actions requiring such votes.”
According to the proxy statement that MasTec issued in advance of its May 22 annual meeting, CEO Mas and his brother, Jorge, chairman of the MasTec board, and other members of their family share ownership of one-fifth of the MasTec’s shareholder voting power.
“It’s not just Florida, it’s across North America ... there’s usually less of a connection between pay and performance at organizations that tend to be more family-run,” Navas said.
Although the results of nonbinding say on pay votes require no specific action by public companies, some South Florida firms have addressed shareholders’ concerns about executive compensation.
Board compensation committees of public companies increasingly are responding to say on pay votes critical of their executive compensation programs, said John Mestepey, managing director of the Miami office of Diversified Search, a 40-year-old executive recruitment firm.
For example, after shareholders of Weston-based Ultimate Software Group cast just 49.5 percent of their say on pay votes in favor of the company’s executive compensation program in 2013, Ultimate retained a compensation consulting firm called Compensia for advice. Then the compensation committee of the Ultimate board of directors modified the company’s executive compensation program. These changes included a 50 percent reduction in the amount of restricted company stock issued to CEO, chairman and president Scott Scherr in 2013, compared to the 2012 amount.
Scherr also agreed not to request or accept an increase in his base salary, which was $700,000 last year, unchanged from his base salary in 2012. His total compensation last year was $8.7 million, down from $10.15 million in 2012.
Ultimate also has adopted a so-called “clawback policy,” which allows the company to recover performance-based executive compensation if the performance proves unsustainable.
“We’re seeing the emergence of more clawbacks,” Mestepey said. Companies want to ensure that bonuses reward “sustainable results and not just short-term results.”
“We also are seeing boards being a lot more careful around perks like use of corporate jets for personal or family travel,” Mestepey said. More public companies are disclosing details of executives’ personal use of corporate jets.
For example, Boca Raton-based prison operator GEO Group disclosed in its 2014 proxy statement that the Internal Revenue Service conducted an audit in 2013 and found that “certain uses of our corporate jet in prior years were non-business related.” As a result, GEO added $62,500 to the income listed on the 2013 W-2 forms of chairman and CEO George Zoley, Jorge Dominicis, senior vice president, community services, and John Bulfin, the senior vice president and general counsel of the company. Its compensation committee separately determined that the executives’ use of the corporate jet to attend “certain charitable events in 2010 and 2011 was business related.” The committee authorized payments of $38,758 to Zoley, $5,756 to Dominicis and $618 to Bulfin to cover their tax liability arising from the 2013 audit by the IRS.
Mestepey also said country club memberships “that a CEO should be able to afford” and company loans to executives with “forgiveness clauses” based on the borrower’s tenure with the company and other conditions are becoming more scarce: “Those perks are going away.”
Also losing wind: so-called “golden parachutes.’’ When a public company is sold, its top executives may be eligible to receive stock awards and other compensation they earned during their tenure with the company in large lump sums, or “parachutes.’’ Mestepey said many public companies are downsizing these severance packages, if for no other reason than “the optics of it.”
Those golden parachutes are sometimes in excess of $100 million, Mestepey said, due to “the vesting of awards that the executives have accumulated over many years.” Fair or not, those numbers aren’t viewed favorably by all shareholders — a reality that compensation committees are beginning to understand.
“We are seeing efforts by boards and compensation committees to pull back from that and limit the amount of windfall an executive is going to get because he engineered the sale of the company,” Mestepey said.
So while executive pay levels still stir controversy, more public companies are trying to defuse dissent over their executive compensation programs by taking such steps as bringing golden parachutes down to earth. “I think the message is getting through to the [board] compensation committees at these companies,” Mestepey said.
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