How much did Ellison make?

Posted by Marc Hodak on July 27, 2010 under Reporting on pay | Be the First to Comment

The WSJ uses the utter lack of real news to put an article on “Top Paid CEOs” on top of its front page.  The decade’s champ?  Larry Ellison.  He “made” $1.84 bilion during the naughts.

How was this calculated?

The Journal and Mr. [Kevin] Murphy [Prof. at USC] measured “realized compensation”—how much an executive actually made during the decade.

The Journal’s totals include salaries, all bonuses, “other compensation” as listed in the proxy statement, the value of stock options at the time they are exercised and the value of restricted stock at the time it vests.

Restricted stock is included only since 2006, when the SEC required companies to report the vesting value.

As a result, some executives may have realized more compensation than the totals listed by the Journal…

The analysis doesn’t track whether executives sold shares they acquired after they exercised options or after restricted stock vested.

This is basically a recipe for highlighting folks who were highly successful founders in the prior decade, and remained as CEO for the most recent decade’ people just like, oh, Larry Ellison.

To see how skewed this is, consider two CEOs, Able and Cane.  Cane grew his company from almost nothing in 1990 into a $40 billion dollar corporation in 2000.  Let’s say he owned a quarter of it, and hadn’t sold any shares as of 2000.  So he owns $10 billion in stock in unrealized gains.  Let’s say he wasn’t paid another dime and the stock went nowhere for the next decade, bur Cane began to sell his shares; in fact, he sold $1.84 billion over those ten years.  The Journal would say Cane “made” $1.84 billion in those ten years.  (BTW – This is not Ellison’s story; Larry pulled down lots of new cash and shares, despite his stock going nowhere.)

Able, on the other hand was hired to lead his $10 billion company starting in 2003.  He received an up front grant of stock worth about $100 million that vested over the next three years until the end of 2005.  Since that grant the value of that stock has gone up over ten times, so it’s now worth about $1.1 billion.  But he hasn’t sold any of it.  According to the Journal, Able has made nothing.  (Remember, they don’t count stock grants before 2006, or unrealized gains.)

Economically speaking, Cane didn’t make anything over the last decade; he simply realized $1.84 billion of the gains he earned in the prior decade.  Able, on the other hand, has made $1 billion, but it’s still an unrealized gain.

And that’s why Larry Ellison is at the top of the list.  And why 80s/90s founders Diller, Jobs, and Fairbank are also in the top five.  Steve Jobs is an interesting case, though; if his stock had vested one year earlier–in 2005–he wouldn’t have made the top 25.

It’s hardly worth coming up with counterexamples given the arbitrariness of this metric.  But at least the paper got some big numbers to put on the front page.