We’ve read a lot over the past few years about supposedly excessive CEO pay. Tens and even hundreds of millions of dollars paid to executives that sometimes preside over outright failure. Severance packages that would provide a comfortable retirement for hundreds of us common folk. Some of us have even pointed out how this situation is somewhat unique to the U.S., and can even violate a "respect for people" pillar of lean manufacturing.
While some push for regulatory control, I’m more market-oriented… the shareholders get what they pay for and there truly is a market that creates value for good leadership. But I’ll admit the reality is that while shareholders could truly mass to create change, they are usually too disengaged or naive to do so, therefore executives get away with being paid for incompetence.
American Express is going to try something a bit different. They are oft-regarded as an exceptionally well-managed company, but even in that context the proposed comp package for CEO Ken Chenault looks a little monstrous.
On Nov. 30 the board gave Chenault options on 1,375,000 shares and announced its intention to give him the same number again on Jan. 31. If it all happens as planned, that will be 2,750,000 shares – a mega-grant by any definition.
Just for context, Amex stock is currently at around 45, although as we know options are really worth a price differential. But when we dive deeper into the details of the comp package, some interesting concepts come forth.
The first surprise is that it’s an options grant at all. Since options are worth money only if the stock rises, a big grant is notable at a time when the market looks expensive by many measures and the economy is weak.
Even more striking are the extraordinarily high hurdles the board requires Chenault to clear if he’s to get any of those options. To receive the full grant, he must beat several goals over the next six years, an unusually distant time horizon. AmEx’s earnings per share must grow at least 15% a year on average, revenues must grow at least 10% a year, return on equity must average at least 36% per year, and total return to shareholders must beat the S&P 500 average by at least 2.5% a year. Chenault can receive a fraction of the grant for lesser performance, but below certain limits, which are still quite high, he gets nothing.
Wow. High goals, rapidly reducing compensation for lesser performance, and a good chance of not getting anything… after having to wait almost a decade in the first place. But even more interesting is how some scenarios play out, which require that Amex not just ride good times.
Now consider a couple of scenarios. Chenault misses all the targets but the market booms, returning 10% a year, and AmEx stock matches it. After their full term of ten years, his options would be in the money by $258 million – but he wouldn’t get any of that. Why? Well, AmEx’s stock presumably rode a rising tide, and his shareholders could have done just as well with an index fund while exposed to less risk. Alternatively, the market returns just 6% a year, in line with what many experts predict, but under Chenault’s leadership AmEx hits all the targets and the stock returns 9% a year. Chenault collects a pretax gain of $222 million after a decade – an awful lot, but his shareholders are $35 billion richer than if they had chosen an index fund, and he’s a hero.
So if we read in ten years that Chenault just collected nearly a quarter billion dollars, will we be outraged? The goals are long term and are driven by increasing value to one of his customers, the shareholders. Could any of us mortals pull it off? Would any of us be willing to deal with the 24/7 stress, travel, and commitment required for such a job? Not me. I’m more than willing to give up 99% of that comp package in order to be able to come home most nights, sleep soundly, and spend the weekends with my family.