News Is Exxon Mobil's $400 Million Retirement Package for Its Former CEO Justifiable?

[Astronuc]

Senator rips ex Exxon CEO's retirement package
http://news.yahoo.com/s/nm/20060418/pl_nm/energy_exxon_senator_dc_1

WASHINGTON (Reuters) - Amid record oil prices and soaring gasoline costs, Exxon Mobil's $400 million retirement package to its former CEO is a "shameful display of greed" that should be reviewed by Congress and investigated by federal regulators, Democratic Sen. Byron Dorgan said on Tuesday.

Dorgan said he wants Exxon Mobil officials to appear at a Senate Commerce Committee hearing to explain how the corporation "justifies" giving its former boss, Lee Raymond, such a huge retirement package.

"There can be no more compelling evidence that the price gouging and market manipulation which has produced record oil prices is out of control, and is working to serve the forces of individual greed and corporate gluttony at the painful expense of millions of American consumers," Dorgan said.

Dorgan's criticism of Raymond's financial package came on the same day that U.S. crude oil prices hit a record high of more than $71 a barrel at the New York Mercantile Exchange.

and "For Leading Exxon to Its Riches, $144,573 a Day" NYTimes - April 15.


Meanwhile - Oil Prices Settle Above $71 a Barrel

WASHINGTON - Oil prices settled at a new high above $71 a barrel Tuesday as supply threats around the world overshadowed a new report from OPEC forecasting weakening global demand.

So gasoline will be more expensive for the forseeable future.


Well, it's not like anyone's forcing you to buy gasoline.

 

[chroot]

I ride my bike to work as often as I can. It's wonderful, especially in spring. More people should try it.

- Warren

 

[luckycharms]

Subway rider and/or walker here. My seldom used car gets 30+ mpg.

If you don't like his retirement package, don't buy his product.

 

[Pengwuino]

Yah, corporations should be forced to bow down to public opinion more often no matter how much gas the public decides on its own to use. Consumers' responsibilities and the US Constitution does not apply here.

 

[russ_watters]

People use a lot of oil so oil prices are high so oil companies make big profits so the outgoing CEO gets a big golden parachute. Seems logical to me...

Politician pontificating.

I'm just upset that I didn't invest in Valero when my parents did.

 

[Pengwuino]

I wonder why aren't senators "outraged" at Bill Gates being worth more then the GDP of many small nations while Windows XP and Office are being sold for $300 and $500 respectively, thus, gouging computer users.

 

[chroot]

Personally, I don't think oil prices should be fixed by the government; I still blindly believe in a free-market economy. To make this point clear: I could care less about the consumers who continue to voluntarily buy so much gasoline to fund this little pig-out. They really do have other options.

I'm more concerned that a $400 million executive retirement package is screwing the shareholders. Keep in mind that most of that package is restricted stock and options that involve the company actually issuing new shares, thus diluting the value of the shares owned by other people. It's a pretty clever way, essentially, of taking a little money out of a lot of investors' pockets and amassing a fortune in your own pocket.

When you consider that most of the floating shares of publicly-traded companies are held by institutions (money-market funds, mutual funds, and so on), you begin to realize that such retirement packages actually screw everyone who has a 401k, an IRA, a certificate of deposit, a T-note, or any other investment of any kind. That ticks me off, Russ.

Pengwuino -- this is the reason no one is crying about the cost of Windows. You don't have to buy Windows, but Big Oil is forcing you and everyone else with any kind of market investment to fund this CEO's pig-out.

Unreasonable executive compensation has been a big issue for a long time now; investors are basically trying to lynch this guy as an example.

- Warren

 

[Pengwuino]

Wait wait wait, since when has MSFT been a private company?

 

[chroot]

Wait wait wait, since when has MSFT been a private company?

What are you talking about?

- Warren

 

[Pengwuino]

What are you talking about?

- Warren

Microsoft is a publicly traded company just like oil companies. Investment institutions own microsoft just like oil companies. 401k's, IRA's, CD's and MMA's may have microsoft shares as asetts just like oil companies. What's the difference?

 

[russ_watters]

Personally, I don't think oil prices should be fixed by the government; I still blindly believe in a free-market economy. To make this point clear: I could care less about the consumers who continue to voluntarily buy so much gasoline to fund this little pig-out. They really do have other options.

Agreed, and frankly, I think high oil prices are necessary to encourage people to find alternatives. Being a believer in the free-market as well, I think that if thin wallets are required to convince people to go back to nuclear power (among other things), then so be it.

I'm more concerned that a $400 million executive retirement package is screwing the shareholders...

That ticks me off, Russ.

Ehh, yeah, I might agree with that. I didn't read the article and don't know quite where that money comes from, but often these things are tied to stock performance, so it may just be that he got a big package because the stock doubled. If the stock got diluted by 0.1% while going up 100%, am I going to complain? Probably not.

Options are more fair (to the shareholders) than a stock gift, though, because they require the stock to go up before the CEO makes any money.

 

[chroot]

Microsoft is a publicly traded company just like oil companies. Investment institutions own microsoft just like oil companies. 401k's, IRA's, CD's and MMA's may have microsoft shares as asetts just like oil companies. What's the difference?

You have no clue what you're talking about.

I'm talking about grants of options and restricted stock diluting maket value of a company's float, which affects everyone in the market, including me and everyone else with a retirement plan or investment of any kind. I have no choice; I cannot opt out of it.

Microsoft pricing a product higher than what you (or I) deem reasonable doesn't affect me at all, unless I actually choose to purchase it.

Your "argument" isn't even remotely related to mine.

- Warren

 

[russ_watters]

Microsoft is a publicly traded company just like oil companies. Investment institutions own microsoft just like oil companies. 401k's, IRA's, CD's and MMA's may have microsoft shares as asetts just like oil companies. What's the difference?

I'm not following you either...

 

[Pengwuino]

Oh geez ok nevermind. I understand what you were saying. I seem to have been way off the mark there.

 

[russ_watters]

You seem to have been talking about price gouging (which was mentioned in the OP), but that isn't what chroot was talking about...

 

[chroot]

If the stock got diluted by 0.1% while going up 100%, am I going to complain? Probably not.

The first rule of arguing finance: don't make up numbers to support made up arguments. Many people will say this: I'm a shareholder. What do I care if the company rips me off a little, so long as the share price keeps going up? The truth is that if every other company, in which you are not a shareholder, does the same thing, the entire market is paying for these greedy executive's unreasonable compensation packages. It adds up to a significant impact on the market as a whole.

Options are more fair (to the shareholders) than a stock gift, though, because they require the stock to go up before the CEO makes any money.

This is also incorrect. A gift of floating stock is exactly equivalent to cash. There's no harm to the market at all if a company buys x shares of stock and hands them to the CEO. Most people wouldn't be so pissed off if the companies just paid their execs in cash. Options, on the other hand, create new shares. They don't affect just the buyer and seller, they affect the entire market.

- Warren

 

[luckycharms]

He's probably the wrong one to pick on for unfair executive compensation. Under his tenure, he took the company from $280 bn market cap to $388 bn. That means he added $108 bn to the company's value and is keeping <0.4% for himself.

In principle, I'd probably agree, but I'd guess that most investors probably aren't upset that he nearly doubled the price of their stock. It's the guys who tank their stocks and then walk away rich who should be the boogie-men. This is just political posturing.

Plus, he's a ChemE PhD. I went to all those grad school career counseling workshops and no one mentioned oil mogul. I'm writing a strongly-worded letter.

 

[chroot]

Again, the only people who care that the stock price doubled are the shareholders. These grant-based executive compensation packages screw everyone, even people who have no intention of ever buying the company's stock.

- Warren

 

[Pengwuino]

I still don't get your point chroot. Which investment vehicles actually give the user 0 ability to actually see what companies are being invested in?

Wait wait don't answer that yet... got to get a grip on what's going on here.

Actually chroot, isn't what your extending extendable to every person who gets stock options down to the lowest salesman? Are you saying all stock option plans are bad?

 

[luckycharms]

You make a good point. I just don't think that this is what the politicians are getting in an uproar about. They're selling a far simpler product: "Look at that rich guy and look at your life. Vote for me."

 

[Pengwuino]

You make a good point. I just don't think that this is what the politicians are getting in an uproar about. They're selling a far simpler product: "Look at that rich guy and look at your life. Vote for me."

Well of course they are but this is actually something that would have implications in the non-ranting world of politics, ie wall street, thus it has some merit to be discussed (although i suspect in a more sensible portion of the forum).

 

[russ_watters]

The first rule of arguing finance: don't make up numbers to support made up arguments.

Heh - yeah, I considered that. Probably doesn't help that I still haven't read the article...

Many people will say this: I'm a shareholder. What do I care if the company rips me off a little, so long as the share price keeps going up? The truth is that if every other company, in which you are not a shareholder, does the same thing, the entire market is paying for these greedy executive's unreasonable compensation packages. It adds up to a significant impact on the market as a whole.

Not really. For stock options to yield an absurd amount of money for a CEO (or anyone else who gets stock options), the stock must go up an absurd amount. I'm going to have to make up some more numbers to explain that...

Lets say some company's stock is currently worth $50 a share. If the company wants to give the CEO a $1 million salary this year on a nominal 5% rise in the stock price (a half-decent year), that's 400,000 shares of stock at a rise of $2.50. If the stock doubles instead, the CEO has made $20 million instead of $1 million.

This is also incorrect. A gift of floating stock is exactly equivalent to cash. There's no harm to the market at all if a company buys x shares of stock and hands them to the CEO. Most people wouldn't be so pissed off if the companies just paid their execs in cash. Options, on the other hand, create new shares. They don't affect just the buyer and seller, they affect the entire market.

- Warren

I thought options were paid out of the same pool of stock that the company already owned. The reason why I would prefer options is because they require the stock to go up before the recipient makes any money. A buddy of mine worked at UNISYS for 5 years, did well enough to get awareded some options, and ended up with worthless options (actually, I'm not sure if he still has them, but they were worthless when he left the company).

 

[chroot]

I still don't get your point chroot. Which investment vehicles actually give the user 0 ability to actually see what companies are being invested in?

Let's say I directly buy a floating share of company X. I have no connection with Big Oil, but Big Oil is sucking money out of the entire economy, depressing the share price of its own stock, and thus depressing the capital that other people might use to buy my share of company X. The result: my share of company X is less valuable because Big Oil screwed many (or all) of my potential buyers.

Again, it's a "small" effect. If I own mutual funds or other financial products that involve Big Oil, I am assuredly still in the black -- just less so. Our economy is doing well these days, so we're not going to die of a thousand paper cuts. That doesn't mean investors should just let the paper cuts happen. They're still egregious market-screwing events.

The $400 million has to come from somewhere, after all. The shareholders are paying $400 million for an expense that does nothing but weaken the value of their investments. It's not a good deal for anyone but the piggie CEO.

- Warren

 

[chroot]

Actually chroot, isn't what your extending extendable to every person who gets stock options down to the lowest salesman? Are you saying all stock option plans are bad?

Stock options are always bad for investors, but they're good for employees. Attracting good employees and keeping them happy, of course, feeds back into making a company good for its investors. It's a delicate balance. A $400 million pig-out, however, is abusing that balance.

- Warren

 

[Pengwuino]

Yah there is that connection and that small effect. This is still pretty rediculous to be calling for senate sponsored lynchings to a single small group of companies or whatnot just so some politician from new england can keep himself in office.

 

[chroot]

Yah there is that connection and that small effect. This is still pretty rediculous to be calling for senate sponsored lynchings to a single small group of companies or whatnot just so some politician from new england can keep himself in office.

This is a problem that's happening (to more and more ridiculous extent) in every large company all across America. It's a recent phenomenon, and people would like to see it stopped.

- Warren

 

[Pengwuino]

Stock options are always bad for investors, but they're good for employees. Attracting good employees and keeping them happy, of course, feeds back into making a company good for its investors. It's a delicate balance. A $400 million pig-out, however, is abusing that balance.

- Warren

Whoa but where do you draw the line? When is it good vs. pigging out for an employee that produces $100k worth of goods compared to a CEO that arguably could have produced $100billion worth of goods based on their management?

 

[russ_watters]

Again, the only people who care that the stock price doubled are the shareholders. These grant-based executive compensation packages screw everyone, even people who have no intention of ever buying the company's stock.

- Warren

I'm not following you now - how does it screw every investor if one company gave stock options?

For stock options to be worth something, the company has to perform well. If the company performs well, then the effect of dilution would be minimal. If the company peforms badly, then the effect of dilution would be nonexistent (all the options would be worthless). For a gift, there would be a dilution effect regardless of whether the stock is performing well.

 

[chroot]

I thought options were paid out of the same pool of stock that the company already owned.

No. Employee stock option grants involve the creation of new shares.

- Warren

 

[chroot]

Whoa but where do you draw the line? When is it good vs. pigging out for an employee that produces $100k worth of goods compared to a CEO that arguably could have produced $100billion worth of goods based on their management?

When the investors (or Senators, I guess) are pissed off, you've crossed the line.

- Warren

 

[chroot]

For a gift, there would be a dilution effect regardless of whether the stock is performing well.

How many times do I need to tell you that option grants involve the creation of new shares?

- Warren

 

[Pengwuino]

When the investors (or Senators, I guess) are pissed off, you've crossed the line.

- Warren

Yah but Senators are just trying to get votes, they are worthless. The guy could have gotten a $40 million plan and the same reaction would have happened. Are the shareholders "pissed off"?

 

[chroot]

Do you read any investment literature? Magazines? The Wall Street Journal? Anything? Value Line?

Investors from here to Japan are pissed off about this. It's pretty much the grudge du jour.

- Warren

 

[russ_watters]

Let's say I directly buy a floating share of company X. I have no connection with Big Oil, but Big Oil is sucking money out of the entire economy, depressing the share price of its own stock, and thus depressing the capital that other people might use to buy my share of company X. The result: my share of company X is less valuable because Big Oil screwed many (or all) of my potential buyers.

Again, it's a "small" effect. If I own mutual funds or other financial products that involve Big Oil, I am assuredly still in the black -- just less so. Our economy is doing well these days, so we're not going to die of a thousand paper cuts. That doesn't mean investors should just let the paper cuts happen. They're still egregious market-screwing events.

The $400 million has to come from somewhere, after all. The shareholders are paying $400 million for an expense that does nothing but weaken the value of their investments. It's not a good deal for anyone but the piggie CEO.

- Warren

That's a tough scenario. The economy is doing well but could be doing better if Big Oil weren't turning so much profit. Ehh, sure, but how much? If Big Oil did only well enough that this ceo got $200 million (heck, or even $2 million), would it pump another hundred billion (1%) into the economy? Probably not, and that's about what it would take for me to care.

 

[chroot]

would it pump another hundred billion (1%) into the economy? Probably not, and that's about what it would take for me to care.

Who cares about the entire economy? I care most about my investments, which comprise a small percentage of my cash flow. I'm concerned about my retirement savings, even if you're not.

- Warren

 

[Pengwuino]

Do you read any investment literature? Magazines? The Wall Street Journal? Anything? Value Line?

Investors from here to Japan are pissed off about this. It's pretty much the grudge du jour.

- Warren

Well if they have a problem with it, they can sell the stock. Thats the beauty of the market.

 

[chroot]

Well if they have a problem with it, they can sell the stock. Thats the beauty of the market.

You still don't get it? The dilution of one company's stock removes money from the market. It removes money from the pockets of people who might buy my shares of another company. It makes everyone's shares of every company less valuable. It screws everyone with any kind of market investment.

- Warren

 

[russ_watters]

How many times do I need to tell you that option grants involve the creation of new shares?

- Warren

I'm having trouble verifying it with a Google, but I'll defer to your statement that they involve creation of new shares. That isn't all that important to the point though because if a stock doesn't go up, the options are worthless and there is no creation of new shares or dilution of the market. Dilution only happens with stock options if the stock gains value.

And it takes a lot of dilution to adversely affect the bottom-line for investors.

 

[Pengwuino]

You still don't get it? The dilution of one company's stock removes money from the market. It removes money from the pockets of people who might buy my shares of another company. It makes everyone's shares of every company less valuable. It screws everyone with any kind of market investment.

- Warren

But you're not taking into account the inflow of wealth the companies that can do that put into the economy, especially when it's a strong economy.

 

[russ_watters]

Who cares about the entire economy? I care most about my investments, which comprise a small percentage of my cash flow. I'm concerned about my retirement savings, even if you're not.

- Warren

When I said "the economy", I was talking about the market cap of the NYSE ($10 trillion) - your retirement savings - my retirement savings too. How much do stock options really hold it down?

 

[chroot]

I'm having trouble verifying it with a Google, but I'll defer to your statement that they involve creation of new shares.

Oh, give me a break. Am I arguing with an unarmed man?

Wikipedia

A benefit to the company's managers is that if options are exercised and employees make money, this is not an actual cash outlay by the company; rather, the money effectively is paid by the current stockholders, in the form of dilution. For example, if the company issues an extra 1000 shares of stock when an employee exercises his options, the company's value is now spread across an additional 1000 shares, so all the company's shares are made to have a slightly lower value.

That isn't all that important to the point though because if a stock doesn't go up, the options are worthless and there is no creation of new shares or dilution of the market. Dilution only happens with stock options if the stock gains value.

How many CEOs write options that they know will be worthless? Many executives take advantage of macroeconomic events or key company milestones to write options that they know will be incredibly valuable. Often, the board of directors goes along with sneaky tactics like the acceleration of vestment to guarantee option grants are as valuable as possible.

After all, option grants aren't accounted as expenses, so they don't even hurt the company's (pretend) earnings numbers.

And it takes a lot of dilution to adversely affect the bottom-line for investors.

If one key employee is given a $100 million retirement package every year, for 1000 US companies, the impact will be $100 billion removed from the market every year. Again, not everyone agrees on what's a "big number" and what's not. You're entitled to your opinion, but I think this kind of market-screwing is worth some consideration.

- Warren

 

[russ_watters]

My point in all this is just that if the company is performing, the CEO is worthy of a big paycheck and him getting a big paycheck affects my bottom line very little. I'm much more concerned with companies giving big paychecks to CEOs who fail (see: Disney).

 

[chroot]

If you invest in Big Oil, and you think Big Oil's CEO did a fine job and deserves $400 million in retirement compensation, that's fine by me -- so long as the company pays it in cash instead of writing options and pulling it out of the market and forcing me to contribute. The US government (or at least one vocal lawmaker) appears to agree with me.

- Warren

 

[russ_watters]

Oh, give me a break. Am I arguing with an unarmed man?

Wikipedia

Well, thanks for the link, but maybe we'll need to call that one a draw. It also says:

Simply granting stock, rather than options, would achieve this same effect, but this would cause a more immediate dilution of stockholders' equity, and would usually give away some voting rights (which option holders do not have).

So it seems that a grant isn't just like cash, as you said: it also requires an issuing of new stock. (edit: ehh, or is it - giving cash removes profit from the company, also reducing its value. So whether you give cash or issue new stock, it works out about the same. Either way, though...)

Or then maybe it isn't a draw: Wik seems to agree with me that a grant is worse because all else being equal, a grant dilutes the value of the stock whether it rises or not (and does it now) while the option dilutes the value only if it rises.

Again, I think that's kinda a side issue, though. We don't disagree by much here in any case...

 

[chroot]

You're being sloppy with the word "grant," Russ. If a company grants you a share, it created the share and handed it to you. That's quite different than a company buying a share of its own float and handing it to you. Furthermore, if the recipient of the option chooses to sell-to-cover instead of executing a same-day sale, s/he has new floating shares and all the voting rights applicable to them. Not everyone executes same-day sales, though, admittedly, most people do.

- Warren

 

[Art]

You're being sloppy with the word "grant," Russ. If a company grants you a share, it created the share and handed it to you. That's quite different than a company buying a share of its own float and handing it to you. Furthermore, if the recipient of the option chooses to sell-to-cover instead of executing a same-day sale, s/he has new floating shares and all the voting rights applicable to them. Not everyone executes same-day sales, though, admittedly, most people do.

- Warren

Share options convey a right but not the obligation to the recipient to purchase shares at a predetermined price at a future date.

How companies finance this can vary. If they have not already reached the limit of their authorised share issue they can indeed issue new stock (resulting in stock dilution). To avoid dilution they may also buy an equivalent amount of shares and retire them or the company can simply buy the stock on the market at the current price and sell it to the share option holder at the option price. The price difference being funded from retained earnings.

That is why many very large companies which have made huge profits for years never pay a dividend. The profits earned are used to finance their employee stock option schemes.

 

[JasonRox]

I see what you're saying chroot.

I don't know much about stocks, but I understand how it affects the whole market. 400 million dollars might be a small chunk of the overall market, but having it happen in most companies or everytime a CEO retires is a problem.

I remember seeing some numbers for large Golden Parachutes and they were usually around 20-50 million dollars. Those were for the top 5. The mere fact that someone got 400 million blows my mind. You are literally letting money leak out of the market/economy.

I'm looking at the economy as some big piggy bank full of cents. Let's say it takes one cent to pay this, then one cent is taken out. Everytime that happens another cent is taken out. After about 25 cents, the difference in weight of the new piggy bank should be noticeable. That's basically saying if everyone has money in there, then everyone will notice the change. It's putting a dent in everyone's wallet. Sure the stock went up, but it shouldn't have.

 

[daveb]

Not to put a monkey wrench in the works, but not everyone has a choice on whther to buy gasoline, that is, if they want to actually live. Some people live too far from their place of employment to bike, there is no public transportation, etc., and they also don't make enough to buy or even rent a place closer to their place of employment. Thus, they have no choice if they want to keep working.

 

[chroot]

Not to put a monkey wrench in the works, but not everyone has a choice on whther to buy gasoline, that is, if they want to actually live. Some people live too far from their place of employment to bike, there is no public transportation, etc., and they also don't make enough to buy or even rent a place closer to their place of employment. Thus, they have no choice if they want to keep working.

Of course, this is true. It would be silly to make blanket statements like "everyone should ride a bike and sell their car." At the same time, it is an ineffective argument, since most people really could get by just fine without a car.

The main reason people cling to their automobiles is simple: fear of the unknown. For example, most automobile trips in this country are shorter than two miles; these kinds of rides would be easy on bicycles. Why don't Americans ride bicycles?

Most Americans are:

- unsure of their own fitness.
- unsure of how exactly one must ride a bike in traffic.
- unsure of where the good bike-friendly roads are, or how to find out where they are.
- unsure of distance; is 5 miles on a bike easy? How about 30? Most Americans don't have a clue.
- unsure of speed; I literally had a friend ask me why it wasn't possible for cyclists to keep up with car traffic, since he thought that cyclists could hold a good 40 mph if they only tried.
- unsure of the effects of heat, cold, inclement weather, or darkness.
- unsure of how their bicycles will fit into their corporate culture, since they don't want to arrive at a business meeting in sweaty spandex and have people take them for a joke.
- unsure of the logistics of bringing a laptop, a change of clothes, or other business necessities with them on a bike.
- unsure of how a bicycle will limit their freedom to change their mind halfway through their commute and hit up the burrito shop all the way across town.

I know all these insecurities first-hand, because I personally had to overcome each and every one of these mental obstacles when I began commuting on a bike. They are, nine times out of ten, wholly mental obstacles. Compared to the confusion of trying to sort out all these unknowns, the good ol' automobile is much more familiar, and thus more attractive.

Keep in mind that people will drive halfway across an unfamiliar city just to get to a McDonalds so they can eat food that is familiar, if mediocre. This facet of human nature is what's keeping many people in their automobiles. Add in some pure laziness and some petty vying for perceived social status, and you've got 21st century American car culture.

- Warren

 

[Cyrus]

At the same time, it is an ineffective argument, since most people really could get by just fine without a car.

I don't think that is true at all. Perhaps, single people in good shape could. I ride my bike, but not to school or work. It's simply too far. I am not going to ride my bike to work and take 1.5 hours, when it's a 30 min drive. It's just not practical. Similarly, I don't expect most American's, or anyone for that matter to ride a bike when they have to bring kids, take groceries, or elderly people. I don't see your justification for your argument. I would say that most people could take a bus places, but not a bike.