Executive Compensation
Steve Jobs challenges CEO pay axioms
Tampa Bay Business Journal - by Graef Crystal San Diego-Based Consultant
Steven P. Jobs is the stuff of which legends are made. He co-founded Apple Computer and, in the process, changed the look of America's workplace. Then he got fired. He next surfaced as the founder of Next Software and, later, Pixar, an animation studio. Finally, in a move that brought him full circle, he sold Next to Apple, rejoined the Apple board of directors and, in short order, took the helm of the company. He continues to run Pixar as well.
Before going further, let's pose two hypotheses, one advocated by CEOs and the second by compensation consultants and corporate governance fans:
• CEOs hold firmly to the belief that they make a huge difference. If a company performs well, it is largely due to the genius of the CEO.
• Owning company shares is a great motivational tonic. CEOs who, as Warren Buffett likes to put it, "eat their own cooking" will perform better than hired hands.
Steve Jobs, as you will read, seems to have exploded both these hypotheses.
First, to his immense credit, he works for not a dime at either Apple or Pixar. And he has been working for not a dime for several years. We can't recall any other CEO of a major company who can make the same claim.
But the performance he has delivered blurs his image considerably. It is as though we were looking at a picture of Albert Einstein wearing a dunce cap.
At Apple, Jobs, after his reincarnation, has performed magnificently. Between July 9, 1997, the day he took the reins following the hasty departure of Gilbert Amelio, and Jan. 29, 1999, the day the research for this article was completed, his company delivered a compounded total shareholder return (i.e., stock price appreciation plus reinvested dividends) of an eye-popping 102.8 percent per year, a level of performance that was 3.9 times the 26.6 percent per year return an investor could have received by putting his money in the S&P 500 Index.
That level of performance was sufficient to rank Apple at the 97th percentile of the distribution of returns among the S&P 500 Index group of companies for the period beginning June 30, 1997, and ending Dec. 31, 1998. In other words, only 3 percent of the companies in the group outperformed Apple.
Now, according to the compensation consultants, when you see performance like that, you ought to expect to see two other things as well:
• A hugely motivational pay package.
• Ownership of lots of company shares.
But as we have already noted, Jobs earns nothing as the CEO of Apple. So if you're looking for the headwaters of his motivational river, look elsewhere.
Of course, there is the issue of share ownership. But guess what? Steve Jobs owns but one share of stock in Apple Computer. That share was worth $41.19 at the close of the markets on Jan. 29, 1999.
Now let's look at Jobs in his other role as CEO of Pixar. As already indicated, he works there, too, for not a dime. But in this case, he owns a ton of shares, 30 million of them worth $1.2 billion as of Jan. 29, 1999.
So if we don't have a motivational pay package here, we at least have a CEO who is positively gorging on his own cooking. Therefore, if the compensation consultants are to be believed, we should find tremendous performance because of tremendous share ownership.
Unfortunately, we do not. Pixar went public on Nov. 29, 1995, and between that date and Jan. 29, 1999, the total shareholder return has been precisely 0 percent. In contrast, the S&P 500 Index returned 27 percent per year. Were Pixar to have been one of the companies in the S&P 500 Index, it would have ranked at the 15th percentile of the distribution for that performance period.
So as a one-man laboratory, Steve Jobs has taught us that:
• The composition of a CEO's pay package has nothing to do with his future performance.
• Owning lots of company shares looks to lead to worse performance than to owning only one share and putting your money somewhere else.
• The CEO may not make all that much of a difference in whether the company is a success or a failure.
So much for compensation consultants.
Crystal is a San Diego-based executive compensation consultant.
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