I’ve documented my thoughts on CEO Pay in prior posts ( CEO Pay, Next Generation CEO, and Productivity Pays – The CEO), but a recent article by Geoff Colvin really had me say out loud “WOW.” The article is called AmEx gets CEO pay right.
AmEx is deserving of the “WOW.” In this day of CEOs preaching performance pay and then receiving restricted stock (which is basically discounted stock awards), AmEx awarded their CEO, Ken Chenault, 2,750,000 shares of stock options. That is a very large number of stock options, but remember, stock options are only valuable should the stock rise and conditions are met. They aren’t guaranteed.
As Colvin notes, this style of compensation should be studied and perhaps copied as a means to incent the CEO over the long run (this deal is over a span of six years). Here is what Colvin writes regarding the consideration AmEx gave to the deal:
complex options grant like Chenault’s would be almost impossible to assemble
and consider on short notice; AmEx’s spokesman says it resulted from three
months of board discussions.
Colvin also writes:
key is the way the grant is structured. The first surprise is that it’s an
options grant at all. Options were all the rage in the ’90s as the market
roared, but lost favor after the bust. They’ve been replaced in CEOs’ hearts by
restricted stock, which is worth money even if the stock price goes nowhere.
Since options are worth money only if the stock rises, a big grant is notable
at a time when the market looks expensive by many measures and the economy is
The last sentence is also hit on by Colvin in his article, but what it is getting to is that AmEx seems to be on the forefront of responding to the backlash that is CEO pay. Normally the backlash is coming from the middle class and the employees, but AmEx has identified their shareholders as the ones who really suffer from the preposterous CEO pay structures.
Colvin writes these two items:
can receive a fraction of the grant for lesser performance, but below certain
limits, which are still quite high, he gets nothing.
Now consider a couple of scenarios.
Chenault misses all the targets but the market booms, returning 10% a year, and
AmEx stock matches it. After their full term of ten years, his options would be
in the money by $258 million – but he wouldn’t get any of that. Why? Well,
AmEx’s stock presumably rode a rising tide, and his shareholders could have
done just as well with an index fund while exposed to less risk. Alternatively,
the market returns just 6% a year, in line with what many experts predict, but
under Chenault’s leadership AmEx hits all the targets and the stock returns 9%
a year. Chenault collects a pretax gain of $222 million after a decade – an
awful lot, but his shareholders are $35 billion richer than if they had chosen
an index fund, and he’s a hero.
I pulled out some stats from the article to highlight what Chenault must do to get his award.
- AmEx’s earnings per share must grow at least 15% a year on average
- Revenues must grow at least 10% a year
- Return on equity must average at least 36% per year
- Total return to shareholders must beat the S&P 500 average by at least 2.5% a year
And here are some repeats of information I think is important
- 2,750,000 shares
- Six year deal
- Shareholders are $35 billion richer than if they had chosen an index fund
- Below certain limits he gets nothing
Finally, here are some links to stories regarding Chenault and AmEx: