advertisement
Meyer's hunch that it pays to avoid companies that overpay their execs is backed by plenty of research:
- Numerous academic studies show that companies that overpay executives or offer them excessive options grants are more likely to underperform or commit accounting fraud to manage earnings, says Patrick McGurn, a special counsel for Institutional Shareholder Services.
- A 2005 study, "CEO Compensation and Credit Risk," by Moody's Investors Service said companies that grant large bonuses and options are more likely to experience downgrades in debt ratings and default on debt.
- A 2007 study said companies whose CEOs buy extravagant mansions, a symptom of excessive pay, tend to underperform after the purchase. (Read my column on this here.)
- A 2007 Stanford University study said huge salary imbalances between top managers and rank-and-file employees cause poor moral and higher turnover, which erodes the talent base by driving away employees, points out Bob Keener of United for a Fair Economy.
- Companies that receive low corporate-governance scores from The Corporate Library -- in part because they have excessive pay or options grants --underperform companies that get high grades for corporate governance.
Countrywide Financial (CFC, news, msgs), where chief Angelo Mozilo cashed out $400 million in stock options from 2003 to 2007 before the stock blew up, is a great example. There are many others. (Read "Why CEO pay fed the mortgage mess" and "The most overpaid CEOs in America.")
3 that ring the alarm
Meyer's aversion to excessive pay and options recently steered him away from three companies that might otherwise look tempting.Used-car seller Carmax (KMX, news, msgs) appears attractive because it's a big position of the Oracle of Omaha. Warren Buffett's Berkshire Hathaway (BRK.A, news, msgs) held 21 million shares, or 9.7% of the outstanding stock, as of the end of March. But Meyer wouldn't touch the stock in part because outstanding options represent 9% of the number of shares on the market.
More from MSN Money
"We could never own this company, regardless of Buffett's endorsement," says Meyer.
As a play on the green trend, Fuel Tech (FTEK, news, msgs) seems to hold promise. It sells air-pollution-control systems used in power generators, boilers and furnaces. It also has a five-star rating from Morningstar, its highest rating. But Meyer rejects Fuel Tech because of the 11% options overhang and because the stock looks expensive with a price-earnings ratio of 39.
EMC (EMC, news, msgs) also seems like a potential buy because the leading network-storage company has been turning in impressive growth. But Meyer is wary of the 11.4% options overhang because it may dilute earnings too much.
5 that pass the test
So what does he like? Here's a look at five companies whose top bosses collect reasonable pay in exchange for management that should bring solid growth:- StatoilHydro (STO, news, msgs): The chief of this Norwegian oil company, Helge Lund, made about $1.6 million last year, compared with pay of $50.5 million for ConocoPhillips (COP, news, msgs) chief James Mulva. Yet StatoilHydro has outperformed ConocoPhillips over the past five years. StatoilHydro holds valuable North Sea reserves and has a bright future because it reinvests so much of its profits to develop reserves in 24 countries, Meyer says.
- Southern Copper (PCU, news, msgs): The head of this mining company, Oscar González Rocha, got a salary of just $456,000 last year, which combined with bonus and other pay gave him total pay of $1.4 million. The company issues no stock options. Southern Copper has several copper mines in Peru and Mexico that produce at relatively low cost. It also owns processing facilities, which helps keep down costs, says Morningstar analyst Annie Sorich. Meyer likes the company's prospects because he thinks a global infrastructure boom will support demand for copper (and copper prices).
Video on MSN Money
Aflac shareholders win 'say on pay'The company's shareholders have become the first investors to have an official say on executive compensation.
- Tenaris (TS, news, msgs): The top executives and directors at this producer of steel pipes made just $16 million in 2006. The company (market capitalization: $36 billion) issues no stock options, but executives get a modest amount of stock as incentive pay. Meyer thinks Tenaris should continue to do well because of demand for pipes from the booming oil and gas industries.
- Ternium (TX, news, msgs): The top executives and directors at this steel producer made $10.2 million in 2006. The company (market cap: $8.7 billion) issues no stock options, but it does offer a modest amount of stock as incentive pay. Ternium was upgraded to a "buy" recently by Goldman Sachs (GS, news, msgs) because of the bullish outlook for steel prices and reasonable valuation of the company's stock.
- Telenor (TELNY, news, msgs): This Norwegian telecom company's chief, Jon Fredrik Baksaas, made just $1.78 million last year, and the company issues hardly any options. Telenor, the main phone company in Norway, also offers wireless and cable service. But growth comes from a presence in emerging markets such as Thailand, Malaysia, Bangladesh and Hungary, says Morningstar analyst Imari Love, who has a four-star rating on the stock.
At the time of publication, Michael Brush owned shares of the following fund mentioned in this column: Mirzam Capital Appreciation.
< previous | 1 | 2 |
Rate this Article
High