Countless people grouse about overpaid athletes, and for good reason. Take Los
Angeles Angels outfielder Vernon Wells, who earned $23 million this past season
yet batted just .218! Of course, at least some struggling athletes can put
paying customers in the seats on name recognition alone. Corporate CEOs,
however, dont have the same advantage. CEOs need to perform. Thus its important
to consider how a CEO is paid before you make an investment in his company.
After all, if the CEOs interests arent aligned with your interests as a
shareholder, theres no point investing. In this second of a series of articles
looking at CEO compensation, well examine the CEO compensation of Occidental
Petroleum (NYSE: OXY ) and Apache Corporation (NYSE: APA ). CEO Compensation
According to the AFL-CIOs Executive PayWatch website , there are 13 companies in
the S&P 500 from the crude petroleum and natural gas industry. The average total
compensation for those 13 CEOs in 2010 was $17 million. Occidentals CEO, Ray
Irani, earned a total of $76.1 million $56.8 million more than Apache CEO
Stephen Farris. But before applying a guilty verdict to the board of directors
at Occidental, its important that we understand how each executive is paid. Its
never black and white. Dr. Irani has been chairman and chief executive officer
of Occidental Petroleum since 1990. Its DEF14A states, Dr. Irani has built
Occidental into the fourth-largest oil and gas company in the United States,
based on equity market capitalization. His distinguished professional,
educational and career experience led him to transform Occidental from a
conglomerate of unrelated business entities into a major oil and gas and
chemical company … Thats quite an undertaking, but is it worth $76 million in
total compensation? In 2010, Ray Irani received $40.3 million in stock awards
and $31.6 million in non-equity incentive plan compensation on top of a $1.2
million salary, $1.7 million in other compensation and a $1.4 million cash bonus
paid at the discretion of the board, of which he is chairman. Dr. Irani owned
7.7 million OXY shares as of Feb. 28, 2011. At the Jan. 4, 2012, closing price
of $96.92, his shares were worth $746 million, making him a very rich man.
However, as best as I can tell, none of the shares were bought on the open
market. They were all stock awards as part of his overall compensation. In the
past five years alone, Irani has received $236.8 million in stock and option
awards. As CEO since 1990, its easy to see how he accumulated his stake. As
alluded to earlier, Apache CEO Stephen Farris earned $19.3 million in 2010.
Farris has been with the company since 1988 and CEO since May 2002. He owned
574,319 shares as of Feb. 28, 2011, worth approximately $55.4 million at current
prices. In 2010, Farris received 69% ($13.3 million) of his total compensation
in the form of stock and option awards. Irani received 53% of his total
compensation in a similar form. Farris might not make it on the Forbes Richest
Americans list anytime soon, but hes certainly comfortable. Both men are paid
well for what they do. Financial and Stock Performance Just as mutual fund unit
holders will turn a blind eye to high management fees when times are good, I
imagine the same holds true for stockholders. While $76.1 million is arguably
excessive compensation for any CEO with the possible exception of the late
Apple (NASDAQ: AAPL ) CEO Steve Jobs, who did bring in paying customers all
shareholders really want is above-average returns on a consistent basis. And in
this respect at least, Irani delivers. Since 2003, Occidentals stock has had
seven out of nine winning years compared to six out of nine for Apache. In those
nine years, Occidentals average annual total return was 28.1% 870 basis points
higher than Apache. In addition, on the two occasions where Occidental
experienced negative returns 2008 and 2011 its losses werent nearly as great.
If preservation of capital is important to you, Occidental has served
shareholders well. From a financial perspective, Occidental also seems to have
outperformed Apache over the past nine years. While Apache grew free cash flow
108% between 2003 and 2011, Occidental managed to increase its free cash by
234%. Furthermore, its book value per share has grown 340% from $10.20 in 2003
to $44.85 in 2011. Apaches book value per share has grown 240% in the same
period. Both clearly have delivered excellent financial results in the past
decade. Bottom Line Occidental points out in its DEF14A that it has achieved
total cumulative stockholder returns of 914% during the past 10 years. While
shareholders have to be pleased, we know from Apaches example that its possible
to compensate the CEO with an industry-average wage and still get good results.
That said, you have to tip your hat to Occidentals performance. As of this
writing, Will Ashworth did not own a position in any of the stocks named here.
More From This Series: Lorillard Getting More Bang Than Altria for Its CEO Buck
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