Featured: Ray Irani, former CEO, Occidental Petroleum
Originally published: Feb. 23, 2012
Who's the most overpaid CEO? Opinions vary, but a new study points the finger at former Occidental Petroleum ( OXY ) CEO Ray Irani.
Conducted by Swiss research firm Obermatt, the study ranked the 100 largest companies in the U.S. by stock performance and profit growth, then ranked the CEOs of those companies by realized pay.
If rich CEO pay deals brought shareholders better performance, you would expect to see a correlation between performance and CEO pay rankings. But there wasn't any.
This puts to lie the excuse that huge CEO pay deals are justified because boards need to pay up to find the best talent -- and to the notion that richly paid CEOs are worth every penny because they have superpower skills.
So why point the finger at Irani?
Over the three years the study looked at, 2008 through 2010, Irani got $372.8 million in realized pay. That made him tops for pay of all the CEOs.
In contrast, using Occidental Petroleum's stock and profit growth as the benchmarks, the company was far from the best performer. In fact, it ranked No. 65 of 100.
Based on their performance rankings and pay comparisons, Obermatt calculated that Irani should have earned only $48.2 million for the three years. In short, he was overpaid by 674% -- some $324.6 million.
That's convincing enough to make Irani my "One-Percenter of the Week" this week.
Irani stepped down as CEO in 2011 but remained as chairman, following years of raised eyebrows about his pay from investors and pay experts alike. "He has featured in our top 10 highest-paid CEO table three times in the past five years," says Paul Hodgson at GMI, which studies executive compensation. "He was the highest-paid oil executive almost every year, but he was not running the biggest company or the most successful. At one point, we branded Occidental Petroleum a serial overpayer."
Particularly galling was Occidental's practice, at one point, of setting the return-on-equity hurdle -- a common measure of shareholder value -- for some payouts below the level achieved for the prior three years. "That's just giving money away," says Hodgson.
The rich Irani pay deals also attracted the ire of activist investors like the California State Teachers' Retirement System and Relational Investors, which were aggressive in getting a "say on pay" vote before Occidental shareholders a year before those votes became more common. Shareholders voted against Irani's pay, and the board backed down by trimming CEO pay.
Though he's gone as CEO, it's still instructive to ask: How did Irani pull off this feat for so many years? Analysts offer these explanations.
First, boards that are too close to management don't do a great job of looking out for shareholder interests, and that may have been the case here. Next, boards sometimes overpay because they are worried about losing their CEOs. To prevent this, they decide to pay their CEOs above the median. But when too many boards all do this at once "pay moves up, for no other reason," says Hermann Stern, the CEO of Obermatt. "I think that could explain a lot of the upward trend in CEO compensation."
One fix that would cut out much of the excessive pay would be to require company stock to outperform a market index before the CEOs can cash out stock options. This would prevent CEOs from banking big payouts merely because their stocks go up with a rising market.
Occidental declined to comment. But in the past when I have written about Irani's pay, the company has responded that his pay reflects "outstanding leadership" which has brought "excellent performance and exceptional returns for shareholders."
Company filings also state that after Irani became CEO of Occidental in 1990, he helped develop it from a conglomerate of unrelated businesses into the fourth-largest oil and gas company in the U.S.
