Featured: Michael Johnson, CEO, Herbalife
Originally published: May 11, 2012
As 2011 CEO pay numbers roll in, we're learning it was a banner year for the One Percenters in the corner offices.
Average pay for CEOs at Standard & Poor's 500 Index ( $INX ) companies jumped a cool 31.4% last year to $12.1 million, says an early study by GMI, an independent research firm. That's two years in a row of big CEO pay hikes.
In contrast, 99% of us got virtually nothing. Average U.S. household income rose just 0.6%, or $291, to $52,370 last year, according to Moody's Analytics.
But what's really interesting in GMI's 2011 pay analysis -- results are preliminary, as not all companies have reported yet -- is the list of CEOs getting the big pay gains.
Top of the list: Michael Johnson, the CEO of a relatively small company called Herbalife ( HLF ) which sells weight-loss products and nutritional supplements. Johnson pocketed $89.4 million last year, or 7.4 times the average at S&P 500 companies.
That was 41% more than the No. 2 CEO in GMI's study, IBM ( IBM ) chief Sam Palmisano, at $63.8 million. Not that anything should make sense in the realm of executive pay, particularly when you account for stock and stock options, but this strikes me as outrageous. IBM, a corporate giant, has annual revenue of about $106 billion; Herbalife has just $3.6 billion. IBM's market cap tops $232 billion; Herbalife's is just $5.5 billion.
So for collecting such a huge number from such a small company, I'm making Johnson my latest "One Percenter of the Week."
I'm not the only one singling out Herbalife for its pay practices. Institutional Shareholder Services, which advises professional investors on how to vote at annual meetings, recently gave Herbalife five red flags, out of a possible eight, for its pay policies.
Violations include the troubling revelation that the CEO's pay is more than nine times higher than pay for the next executive in line. This can be a sign of bad succession planning. Then there are the huge golden parachutes awaiting Johnson, which would pay him $54 million for termination without cause or $84.6 million in the event of a takeover. Paying execs so much after they leave is a problem because, by definition, it doesn't incentivize them to work harder for shareholders.
Herbalife also gets six red flags out of a possible eight for shareholder-rights problems and four of eight red flags for its board structure. Among the reasons: About a fifth of directors have business relationships with the company, a possible conflict of interest, and Johnson serves as both CEO and chairman of the board.
Herbalife declined to respond. But it's worth noting that sales grew an impressive 26.4% last year to $3.45 billion, following 8.5% annualized growth for the prior three years. And solid sales strength continued in the first quarter, at 21.3%. That led to huge stock gains -- until recently -- which rewarded shareholders and allowed Johnson to cash out a lot of options.
But another troubling angle here is when Johnson cashed in those options: just ahead of a huge stock decline.
Johnson exercised more than 1.8 million stock options in 2011 for a profit of almost $77 million, according to GMI. And so far this year, he has unloaded $41.7 million worth of stock.
Most of this was sold before Herbalife shares tanked on May 1, in a slide that's taken it down to $46 from more than $70 a share on April 30. His selling continued that day, after the sharp decline started. Insiders overall sold $64.7 million through May 3 this year, according to Thomson One Analytics.
Why did Herbalife shares tank? Because well-known short seller David Einhorn, of Greenlight Capital, showed up on the company's conference call asking some pointed questions about the company's distribution system. Herbalife uses a system of independent distributors who collect profits and royalties on sales of products. Einhorn wondered how many customers were posing as distributors to get discounts, and what that might mean for growth.
Einhorn's questions were "pretty innocuous," says D.A. Davidson analyst Timothy Ramey. But they spooked investors because Einhorn has gotten several negative bets on stocks right, most recently against Green Mountain Coffee Roasters ( GMCR ), which has fallen 76% since last summer to around $26.
Eleven of the 12 analysts who cover Herbalife maintain a "strong buy" rating and an $81.50 price target on the stock, according to Thomson One Analytics. And since its big tank, the company has announced a $428 million buyback.
But one theory going around holds that Einhorn's questions are a prelude to his laying out a more detailed case against Herbalife at the Sohn Investment Conference in New York City on May 16. I've already gotten my press pass to check it out.
