Three Firms with Outrageous Executive Compensation

In times of economic recession, wages tend to decline as output falls and prices decrease. This doesn’t always hold, however, especially when it comes to executive compensation. A controversial issue by any measure, I was particularly intrigued to read a piece in Fortune magazine with some quite astonishing points of interest.

“High pay for outside directors of corporations guts the whole idea of these representatives of the shareholders making independent judgments. How does a board member challenge a CEO when the director is being paid oversize amounts likely to be important to his or her lifestyle?” screams the very first paragraph of the article.

For the article, Fortune collected data for 491 large and important companies. Those 491 paid their nonemployee directors an average of $213,000 in 2008. The data set then turned to the proxy statements of the 23 companies in the survey whose average exceeded that of the dataset by more than 85%, or $400,000.

The result is 10 companies that pay their directors “spectacularly”. Here are three of the ten – interestingly all in the energy sector.

“XTO Energy (XTO), a Fort Worth oil and gas exploration company that Exxon Mobil (XOM) recently announced it would buy, gets the prize. Or rather director Jack Randall, 60, got it, and it was $1.56 million in 2008 compensation, more than seven times the average. Randall is not considered an ‘independent’ director, because he's with securities firm Jefferies Group, which does business with XTO. Talking to Fortune, he said, "I like to think I act with independence." He added that he had ‘no indication’ he doesn't.”

The natural gas industry throws up another top ten entrant. “Chesapeake Energy (CHK) exhibits the most bizarre set of circumstances. In the first place, the high earner among Chesapeake's eight nonemployee directors in 2008 was Breene Kerr, a cousin of CEO Aubrey Kerr McClendon. Kerr (who, having turned 80 left the board this year) received $784,687. Second, all eight of the company's outside directors were paid richly in 2008, averaging $670,000. Third, they drew notorious attention because of their benevolent treatment of a reeling McClendon. Bad judgment had done him in. An indefatigable bull on Chesapeake's stock through mid-2008, McClendon, now 50, bought heavily on margin, amassing a stake that at Chesapeake's July high of $72 a share exceeded $2 billion. In December the stock plunged to $10 as the credit crisis flared and petroleum prices plummeted. Two months earlier, margin calls had forced McClendon to sell almost all of his position, at prices between $13.60 and $24 a share. The sales clobbered his net worth.”

Such a hit would no doubt bankrupt or at least severely damage the fortunes of mom and pop investors. Not so at Chesapeake, however. “Racing to the rescue like corporate first-responders, the Chesapeake board awarded McClendon a $75 million special bonus for 2008. Other compensation raised his total to $100 million, one of the highest figures in the land”.