CEO Compensation

[Paul_D_North_Jr]

Railway Man

  [snip] Salary has nothing to do with what people are worth, it pertains only to what people are willing to pay.  If the salary for a railway CEO job was capped at $400,000 I can assure you that there would be an ample number of qualified bidders for the job.  

RWM

This comment echoes what oltmannd / Don said in a few posts above to the effect of ''What if the compensation committee tried to see how little it could pay the incumbent before he would leave ?'', because there are not many other businesses where his skills would be as marketable, among other reasons.

But it seems to me that the weakness to these approaches is that they work only for the current CEO and current crop of senior level candidates for that position who are therefore not terribly mobile to other businesses.  To ignore what people are worth - even and especially if that is determined only by what someone else is willing to pay, which may be the best of all and the only measure of 'worth' in a capitalistic system such as ours - is to 'sell the company short'.  For the subsequent and future cohorts of potential management personnel, the response is then likely going to be along the lines of, ''If that's all they're going to pay - even for the top job, then I'm going into another line of work, such as high-tech, etc.'' - except for us railfans, of course.  For example, I have no doubt that Rob Krebs would have succeeded in any business he went into - he didn't have to stay with railroading.  So the willingness to pay should take a longer-term and broader view other than the current Board of Directors' attempts to minimize those salary expenses, or other misguided and counter-productive motives.

My other point is even if there are an ample number of qualified candidates, what we nevertheless want is the absolute best one - however the heck that can be determined.  For an enterprise such as BNSF - which had a pre-Berkshire Hathaway acquisition total market capitalization on the order of $24 billion, based on the share price, which is what should matter the most to the Board and the shareholders - even an increment in value of as little as one-tenth of one percent = 0.1% amounts to $24 million.  So if the Board's - and/ or Matt Rose's - perception is that he is at least 1/10 of 1 per cent better than the next leading contender for the position, then they are justified in paying up to that much more to assure that BNSF continues to have the benefit of his services - and not a competitor, such as UP. 

Otherwise, I may not be correctly understanding the comment above.

- Paul North.

P.S. - Another possible subjective and wacky psychological factor is perception and credibility outside the industry, such as with bankers and politicians.  Even if a railroad CEO would be happy with $400,000 a year - my concern is whether he will be taken as seriously as we would want, when he has to meet with the Goldman Sachs analysts who make at least that much, or appear before a Senate hearing, etc., when he's next to a guy from another industry - say, coal or oil - who is making $4 million a year instead ?  Who do you think will get the most attention, respect, deference, and be judged as the most believeable ? - PDN.

[blownout cylinder]

Ulrich

A very small base salary together with a performance component is best I think...that way everyone from axle greaser on up to CEO gets paid in accordance with how well they do.

Any cap would have to be done through that board---if it ever became a real issue. In my books.

I think that any kind of salary cap is going to be problematic---look what happened to the major league sports when they tried something like that---it soon became superfluous because everyone was trying to get it lifted.

As for the suggestion here, it could work--if it was actually followed and not, as what happened in some cases, seemingly reversed. There were a few cases wherein CEO's got paid more when the company actually lost money----

I tend though, to think that RR's do much better, overall, than a lot of other sectors in this regard. We don't seem to be having that issue here----

[Ulrich]

Who would enforce the salary cap..the government? The salary cap doesn't jive with capitalism and our free market economy. and you can't effectively cap one salary without capping everyone else..or else you're going to get commission sales people who make more than their bosses three levels up etc..The amount of the compensation is really secondary to the methodology used to determine compensation. A very small base salary together with a performance component is best I think...that way everyone from axle greaser on up to CEO gets paid in accordance with how well they do.

[blownout cylinder]

Railway Man

If we are talking about railroads (are we?) then all due respect but this is utter nonsense.  Salary has nothing to do with what people are worth, it pertains only to what people are willing to pay.

And they'll pay at least that very amount that is in parity with what others in the industry are paying. Why else would one come across ads in papers or such offering competitive wages?

I don't think it is either/or. The idea is that it is frequently bellowed in the media and in board rooms--BTDT--that in order to get the best person for the job one had to pay a competitive wage. Hence my earlier point about salary/compensation inflation.

There was an idea some years ago about something of a salary cap. I wonder-------

[Ulrich]

Compensation is that high because there are no salary caps and the ownership is therefore compelled to offer  going market rates. Why else would pay be that high?

Furthermore, a good CEO doesn't need railroad experience...look at Paul Tellier..no prior railroad experience...no prior business experience even. Yet most would agree that he did a fine job...as his "Railroader of the Year" accolade would suggest. Thus, compensation has to take into account that people who are qualified for these top jobs can work in other industries as leaders, and the pay must therefore be similiar to what is offered to CEOs in other industries.

 

 

[MP173]

Correct me if I am wrong, but dont most railroads promote from within?  This does make the industry a little more organically developed, rather than going outside the industry.  Most transportation companies stay within their organization, or at least their industries.  You see very few outsiders coming in to run railroads, trucking companies or airlines.

So why do they pay the large salaries?  It is a great question for the next annual meeting.  There will be a round of them starting in April/May.  If you are an owner in the company, go to the meeting, if it is in your schedule and within reasonable travelling.  Be prepared, most do not last very long, so dont be late. 

Remember these packages are negotiated, no one holds the board at gun point. 

Don, while there might be a number of internal candidates at one time (most are in various stages of developement in their careers), the board's job should be to find the absolute best candidate out there for the position.  Probably 95% of the time, CEO's job are on cruise control.  If he/she has done a good job up to that point, the organization is running itself fairly well.  The other 5% of the time (perhaps even less) is crucial. 

Go back and read The Men Who Loved Trains.  Look at the leaders in book.  Examine what NS's CEO David Goode brought to the table during the Conrail merger negotiations.  Hunter Harrison, a lightning rod on this forum, has instituted huge change at CN.  Krebs and Rose have made very important decisions for the long term at BNSF, while UP seemed to stagnate at times. 

Now, are those CEO's worth what they were paid?  That is up to the investors in the company.

Interesting note, yesterday's Chicago Tribune had a huge front page article on CEO compensation and I would recommend you find it on line.  The article dealt with a $600,000 salary to the CEO of a non profit housing unit in Chicago. 

Ed

[oltmannd]

Railway Man

If we are talking about railroads (are we?) then all due respect but this is utter nonsense.  Salary has nothing to do with what people are worth, it pertains only to what people are willing to pay.  If the salary for a railway CEO job was capped at $400,000 I can assure you that there would be an ample number of qualified bidders for the job.

Which leads back to the question of why the boards pay the RR CEOs what they do? Most roads have a number of internal candidates at any point in time. I find it hard to believe that there would be a huge difference in the level of performance between them, so why the premium pay?

[Railway Man]

blownout cylinder

I find that the issue of whether there is comparison between competitors regarding their CEO's compensation packages has to be answered with an emphatic yes. The reason being that if you are in that ballpark in terms of revenue and capitalization you have to have some very attractive figures and things to back your hunt up. Getting a CEO nowadays is not as easy as it was a few years ago either----performance numbers are starting to be coming back into use again-------

 

If we are talking about railroads (are we?) then all due respect but this is utter nonsense.  Salary has nothing to do with what people are worth, it pertains only to what people are willing to pay.  If the salary for a railway CEO job was capped at $400,000 I can assure you that there would be an ample number of qualified bidders for the job.

RWM

[blownout cylinder]

schlimm

selector

The only comparative basis that has any objective value is in comparision with the same board, the previous one or two compensable CEO(s), and their respective performances.  Comparing GM's CEO compensation package with Ford's is trying to link the two on metrics that my not have the same internallyassigned values.  Even within BNSF the values may change from year to year.

It would be better, in my view, to avoid values-laden terms, like over or under, and just use more or less, which are relativistic and invite more objective comparative bases. 

 

If what you say were true in the corporate world, why would magazines like Fortune and Forbes and sources like the Corporate Library bother with comparisons of CEO compensation?  You don't think Exxon execs compare their pay with folks at Shell, etc.? 

But I do agree it is better to use terms like "more" or "less" and let the chips fall where they will.

I find that the issue of whether there is comparison between competitors regarding their CEO's compensation packages has to be answered with an emphatic yes. The reason being that if you are in that ballpark in terms of revenue and capitalization you have to have some very attractive figures and things to back your hunt up. Getting a CEO nowadays is not as easy as it was a few years ago either----performance numbers are starting to be coming back into use again-------

[schlimm]

selector

The only comparative basis that has any objective value is in comparision with the same board, the previous one or two compensable CEO(s), and their respective performances.  Comparing GM's CEO compensation package with Ford's is trying to link the two on metrics that my not have the same internallyassigned values.  Even within BNSF the values may change from year to year.

It would be better, in my view, to avoid values-laden terms, like over or under, and just use more or less, which are relativistic and invite more objective comparative bases. 

 

If what you say were true in the corporate world, why would magazines like Fortune and Forbes and sources like the Corporate Library bother with comparisons of CEO compensation?  You don't think Exxon execs compare their pay with folks at Shell, etc.? 

But I do agree it is better to use terms like "more" or "less" and let the chips fall where they will.

[MP173]

Who has read the proxy statements which outline the compensation packages?  I havent read UP, NS, or CSX's recently, but did read BNSF's about a year ago.

At this time, I am not going to check each of the big 4's proxies to determine their compensation packages.  However, on my desk is a proxy for a quite large S&P100 company with revenues of $20b and net income of $1.7b.   The company is Emerson and their fiscal year ended Sept 30th, so their annual report is ahead of the crowd.

Their proxy devotes over 22 pages to executive compensation, including an overview plus specifics to their executives. 

Emerson's compensation components is as follows:

Restricted stock - typically 5-20% of total compensation with vesting period of 10 years

Performance shares - 45-55% of total compensation - based on the performance of the company over a three year term.  These performance shares are based upon hitting specific performance goals such as revenue growth exceeding the GNP.   The payout is in the form of company stock with cash being awarded to cover tax ramifications of the awards.

Stock options - 5-10% of total compensation.  The stock options are typically a 10 year option with 1/3 of the options vesting each year over a three year period.  If the stock doesnt rise, oops, no reward.  Note the performance of most equities over the past decade.

Annual bonus -10-20% of total compensation.  Emerson uses sales, earnings, gross profit margins, free cash flow, return on capital, and return to shareholders as the factors for establishing a bonus. For FY 2009, bonus payments declined substancially for the five named executives.

Base salary - 5-20% of total compensation.  Merit salaries awarded each year based on the previous year performance.  For each of the five Emerson executives, base salaries either fell or were flat. 

What does all this mean?  It is still a pretty good job if you can get it (make that IF YOU CAN GET IT).  Competition is very tough to make it to that level.  You are the leader of a company with perhaps 20,000 or even 100,000 employees. 

I am compensated nearly 100% on performance.  There are no guaranteed compensation levels for MP173.  If and when that becomes unattractive or doesnt reward me for my services, I will look elsewhere.  I am NOT an executive, nor am I waving the banner for CEO's in general.  But, I do understand pay for performance and the risks involved. 

I own companies such as Exxon Mobil in which Rex Tillerson's compensation level absolutely doesnt bother me.  Dont get me started however on Pfizer's past CEO (cannot recall his name).  It drove me to write the Board. 

I dont envy what other people make.  Long ago it became obvious that if money was to be my sole motivator, the infrastructure was in place for that.  My sins are other than envy.

Lets see what this year's proxies bring as far as compensation.  My guess is their overall levels will drop substancially, based on the criteria outlined above for Emerson.

But remember, if you really want to be CEO, it can happen.  Just as it can for other desireable careers.  Probably not for me at my age and place in life, but nothing is impossible.

Back to work,

Ed

 

[selector]

schlimm

...it does appear that CEO's of the Big 4 (& KCS) seem over-compensated...

I don't understand this snippet.  The only comparative basis that has any objective value is in comparision with the same board, the previous one or two compensable CEO(s), and their respective performances.  Comparing GM's CEO compensation package with Ford's is trying to link the two on metrics that my not have the same internallyassigned values.  Even within BNSF the values may change from year to year.

It would be better, in my view, to avoid values-laden terms, like over or under, and just use more or less, which are relativistic and invite more objective comparative bases.  Once we all agree that one CEO is paid more than another, and not 'overpaid', then we can objectively analyse the compensation criteria, assign comparative values to those, and go from there.  Why does one corporate board value one factor more than the others do, for example?

-Crandell

 

[schlimm]

Murphy Siding

If what you're trying to say is you think the CEOs of railroads are overpaid,  I'd have to disagree.   They get paid the fair market value of what the people who hired them think they are worth-no?

 

That is rather circular reasoning.  They are paid $ X.  That is what the people who hired them paid them, so-called "fair market value."  So because they got paid what the board paid them, it must be right.  I think Barry and several others have pointed out that CEO compensation in general is a topic in boardrooms.  And corporate governance (directors) is only a little farther down the road.

[Murphy Siding]

schlimm

Murphy Siding

You seem to be trying to concoct objective  figures  to support a subjective premise.  What's to say that you're not proving that the other CEOs are underpaid?

 

I will ignore your use of the word concoct.  Is it so hard to perceive something is off?  Apparently you are saying that most everyone else is out of line.  Of course, if you regard US rails as the center of the universe or at least, the Standard of the World, then you are probably right.

Exxon Mobil  #2;  Profits = $45 Bil.!!!  CEO compensation = $32.2 mil.  Boy, does Rex deserve a big raise!!

   I'll agree with you, that concoct was not the right word to convey my meaning.  Insert the word *use* in it's place.  The end result is the same.

      Is it so hard to perceive something is off?  My answer is yes, because we're looking at figures out there in space, with no meaningfull way to compare them to anything.  For example:  let's say I have a 45' tree in my yard.  Three neighbors have trees that are 35', 38' and 42'.  We can compare, and figure out that my tree is taller.  We can't tell from that information if my tree is too tall, or if there's is too short.  We have no more ability to determine if Matt Rose is  overpaid than we do to determine if my tree is too tall. 

    If what you're trying to say is you think the CEOs of railroads are overpaid,  I'd have to disagree.    I don't have enough information, nor the expertise to tell, if I did have the information.  They get paid the fair market value of what the people who hired them think they are worth-no?

    

[oltmannd]

Paul_D_North_Jr

The question instead should be, ''How much do we have to pay to get or keep the man or woman who is most likely to provide the company with its best profit on operations or return ?'', and, ''Is he or she worth it when compared to the next-best candidate and that increment of value that the candidate is expected to deliver ?''  As long as that person can reliably deliver at least $1.01 (and preferably more) for every $1.00 spent, the firm ought to maximize taking advantage of that opportunity as much as possible - not trying to minimize it. 

That would be the question if RR CEOs were fungible, like IT workers, but they are not. The next two or three best CEO candidates for BNSF are likely inside BNSF because of the peculiarities of BNSF's territory, business and culture. You really wouldn't want to plug in a CEO from a bank or a computer manufacturer, would you? If you cut Matt Rose's compensation by 70%, where could he go?

[Paul_D_North_Jr]

Ulrich

  Look at the poor guy at KCS..having to make due with a paltry 2 mil...

Yes, but his railroad is just as wide - and Fred Frailey even wrote an article about it that appeared in Trains a couple months ago ! 

More to the point, very roughly it would appear that Class I's CEO pay is about a little under 10 % of the profit figure - but the KCS guy gets closer to 15 % - so he's getting about half again as much of a smaller pie . . . and also has an executive train !  

- Paul North.

[schlimm]

Murphy Siding

You seem to be trying to concoct objective objective figures  to support a subjective premise.  What's to say that you're not proving that the other CEOs are underpaid?

 

I will ignore your use of the word concoct.  Is it so hard to perceive something is off?  Apparently you are saying that most everyone else is out of line.  Of course, if you regard US rails as the center of the universe or at least, the Standard of the World, then you are probably right.

Exxon Mobil  #2;  Profits = $45 Bil.!!!  CEO compensation = $32.2 mil.  Boy, does Rex deserve a big raise!!

[Ulrich]

Look at the poor guy at KCS..having to make due with a paltry 2 mil...

[Murphy Siding]

schlimm

clarkfork

I presume the revenue figures are gross.  Possibly a better rate of comparison would be dollars of profit.

 

OK, there are some differences:

Company         2008 Profit       CEO's compensation

BNSF               $1829 mil.               $15.5 mil.

 UP                  $1855 mil.               $16.3 mil.

CSX                 $1336 mil.               $11.6 mil.

NS                   $1464 mil.              $13.9 mil.

KCS                   $154 mil.              $2.1 mil.

UPS                 $3003 mil.              $5.9 mil.

DB                   $1913 mil.              $3.2 mil.(operates passenger as well as freight services)

 

Whatever metric is used, it does appear that CEO's of the Big 4 (& KCS) seem over-compensated, whether the comparison is with a related business, UPS, or a larger rail/logistics company outside the US, DB.

 

 

  You seem to be trying to concoct objective objective figures  to support a subjective premise.  What's to say that you're not proving that the other CEOs are underpaid?

[schlimm]

clarkfork

I presume the revenue figures are gross.  Possibly a better rate of comparison would be dollars of profit.

 

OK, there are some differences:

Company         2008 Profit       CEO's compensation

BNSF               $1829 mil.               $15.5 mil.

 UP                  $1855 mil.               $16.3 mil.

CSX                 $1336 mil.               $11.6 mil.

NS                   $1464 mil.              $13.9 mil.

KCS                   $154 mil.              $2.1 mil.

UPS                 $3003 mil.              $5.9 mil.

DB                   $1913 mil.              $3.2 mil.(operates passenger as well as freight services)

 

Whatever metric is used, it does appear that CEO's of the Big 4 (& KCS) seem over-compensated, whether the comparison is with a related business, UPS, or a larger rail/logistics company outside the US, DB.

Additionally, I wonder how UP (substitute NS, BNSF, etc. employees and mid-management folks feel about those CEO pay packages?

 

 

[clarkfork]

I presume the revenue figures are gross.  Possibly a better rate of comparison would be dollars of profit.

[schlimm]

The Big 4 class 1's + KCS:

Company         2008 Rev.   CEO comp.

 #154 UP          $16.3 Bil.   $16.3 mil.

#160 BNSF       $15.8 Bil.   $15.5 mil.

#261 CSX         $10.0 Bil.   $11.6 mil.

#276 NS           $9.4 Bil.     $13.9 mil.

#963 KCS         $1.7 Bil.     $2.1 mil.

 

 

[schlimm]

Murphy Siding

Unless UPS and DB are North American class 1 railroads, I believe you've given us a classic illustration of comparing apples and oranges.

 

One can compare with other Class I's, of course.  What I am giving is a comparison with members of the same industry (comparisons within an industry are commonly used, BTW)  to see how revenues and compensation compare with two representatives, one a railroad/logistics company and the other a logistics company.

[Murphy Siding]

schlimm

When one compares BNSF with UPS and Deutsche Bahn, it becomes apparent that Rose's compensation is out of line.

Company         2008 Revenue       CEO's compensation

BNSF               $15.8 Bil.               $15.5 mil.

UPS                 $49.7 Bil.               $5.9 mil.

DB                   $42.8 Bil.                $3.2 mil.

So UPS and DB are 2 1/2 to 3 X as large, yet Rose gets 2 to 5 X as much compensation. 

     Unless UPS and DB are North American class 1 railroads, I believe you've given us a classic illustration of comparing apples and oranges. It would be about as relevant as comparing the average height of the CEO compared to the company's revenue.  Does anybody know how tall Matt Rose is?

[schlimm]

When one compares BNSF with UPS and Deutsche Bahn, it becomes apparent that Rose's compensation is out of line.

Company         2008 Revenue       CEO's compensation

BNSF               $15.8 Bil.               $15.5 mil.

UPS                 $49.7 Bil.               $5.9 mil.

DB                   $42.8 Bil.                $3.2 mil.

So UPS and DB are 2 1/2 to 3 X as large, yet Rose gets 2 to 5 X as much compensation. 

[Paul_D_North_Jr]

 

oltmannd

  One other thought. I wonder what the compensation would be if the compensation committees took the view, "How little can we pay him before he decides to leave." Money is only one thing that makes a job satisfying. 

That's exactly why I mentioned the business car and ''Executive E's'' in one of my previous posts.  Which one of us wouldn't take the job for say $200,000 a year and unlimited use of them - OK, maybe only in our dreams, but you know what I mean. 

Or, as Sir William Cornelius Van Horne, K.C.M.G. - the General Manager and later President, etc. of the Canadian Pacific Railroad - is reported to have famously said, something along the lines of the following:  ''I have never worked a day in my life, and I don't intend to.  Like most men, I hate it.  Building this railway has been a supreme adventure, and I have enjoyed every minute of it.''

But I have to disagree with the view that you twonder about above.  That is the parsimonious 'lowest price at any cost'   view of a purchasing agent, who knows nothing of the potential value to be gained, but only of supposed cost to be avoided - and which has gotten this country into a lot of trouble in the past 50 years or so.  The question instead should be, ''How much do we have to pay to get or keep the man or woman who is most likely to provide the company with its best profit on operations or return ?'', and, ''Is he or she worth it when compared to the next-best candidate and that increment of value that the candidate is expected to deliver ?''  As long as that person can reliably deliver at least $1.01 (and preferably more) for every $1.00 spent, the firm ought to maximize taking advantage of that opportunity as much as possible - not trying to minimize it.  Why deny the potential benefit that could be obtained thereby ? 

- Paul North.

[beaulieu]

Another point to consider is what members of the Fortune 500 reported losing money last year, what their CEOs received in pay, and what effect that had on the average. All the railroads reported decent (albeit lower) profits last year. Two members of the Fortune 500 (at least) went out of business in 2008, Bear Stearns and Lehman Brothers.

[blownout cylinder]

Paul_D_North_Jr

It would be interesting to look up each Class I and the companies on either side of it and compare them in terms of CEO pay, market capitalization, revenue, income, and last year's results.

I've started doing something like this and it appears like the numbers do line up as regards the comparative compensation levels. I wonder though whether these committees are thinking about setting limits to the compensation levels---thinking about ratios here. There are going to have to be other ways of getting job satisfaction there.

Question----if a person really enjoyed doing what they did for a job would income level be really important? In my job, flexibility of work locations and time is important. I can work from home or on the road--I don't drive and key while driving---or the office. I'm not quite 9-5 here-----QA does this kinda thing, heeheehee

[Paul_D_North_Jr]

oltmannd

  [snip] One other thing to consider is where the RRs are in the Fortune 500. The lowest one is NS at 256, so you'd expect the avg compensation of the RR CEOs to be higher than the avg for the Fortune 500. 

Thanks, Don - I had the exact same thought, but not enough time to research it.  It would be interesting to look up each Class I and the companies on either side of it and compare them in terms of CEO pay, market capitalization, revenue, income, and last year's results.  I expect that they would be right in line - they oughta be, or the compensation committee isn't doing it's job right by either side.

- Paul North.

[oltmannd]

One other thought. I wonder what the compensation would be if the compensation committees took the view, "How little can we pay him before he decides to leave." Money is only one thing that makes a job satisfying.