The 5 most outrageously overpaid CEOs

Here’s the pantheon of execs whose paychecks soar while their companies suffer. Also: 5 who produce stellar results for a comparative pittance.By Michael BrushAll's fair, they say, in love and war. Not much is out of bounds when it comes to executive pay, either.Consider Michael Ovitz. Although stockholders sued, the one-time Hollywood superagent gets to keep the $140 million he was paid for 14 months of work as president at Walt Disney (DIS, news, msgs). A Delaware judge ruled in mid-August that Disney's board didn't breach its responsibilities in awarding the huge severance package.While the Ovitz payout may have been legal, it's the type of corporate behavior that costs investors millions of dollars every year. And it's not just a few spendthrift companies throwing good dollars after bad leaders. We scoured corporate regulatory filings and found plenty of examples of overpaid underachievers in executive suites. Ultimately, we came up with a list of the five most overpaid bad chief executives, and another of the five most underpaid good execs.

Start investing with $100.Explore ournew ETF center.Our goal was more than uncovering a few egregious examples of corporate largess. This was an exercise in finding out which boards are working for shareholders and which have lost sight of that mission.Fat pay, thin performanceRather than focus on single-year offenders, we rounded up -- with help from Standard & Poor's -- the worst performing stocks in the S&P 1,500 over the past several years. Then we looked for the CEOs with the fattest compensation packages -- including base pay, stock grants and the value of options awarded the chiefs, as calculated using the Black-Scholes model, a common tool for valuing options.We also asked S&P to help us find the CEOs who collect the least pay in exchange for the best performance.
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The worst offendersThe upshot: Some boards award breathtakingly large pay packages to CEOs even as the executives trash their shareholders’ investments. The worst:

Top honors go to Gary Smith at Ciena (CIEN, news, msgs). His shareholders have been virtually wiped out -- losing 93% in the past four years. His compensation over that period: $41.2 million.
Jure Sola, the CEO and chairman at Sanmina-SCI (SANM, news, msgs) collected $26.4 million during the past four years while Sanmina shares fell 78%. The bulk of Sola's pay came in the form of a performance bonus of $19.9 million, paid for hitting one recent quarter's targets.
Sun Microsystems (SUNW, news, msgs) paid Scott McNealy, its CEO, chairman and founder, $13.1 million a year over the past four years, even as Sun's shareholders lost 76% of their money.

Shares of supermarket chain Albertson's (ABS, news, msgs) fell 39% over the past four years. Despite this dismal record, Albertson’s CEO and Chairman Larry Johnston collected a total of $76.2 million in that time.

Under CEO Peter Dolan’s watch at Bristol-Myers Squibb (BMY, news, msgs), shareholders have seen the stock decline by 48% over the past four years. Dolan took home $41 million.“I feel nothing but contempt,” says Don Hodges, president of the Hodges Fund (HDPMX). “They pay themselves like they are rock stars.” Particularly irksome to Paul Hodgson, an analyst at the Corporate Library, an independent research firm that provides corporate governance analysis, was the bonus paid by Sanmina-SCI. Hodgson’s complaint: Performance pay should reward long-term results. But the Sanmina-SCI board handed out a huge bonus just because of good results in one recent quarter -- even as long-term investors suffered. Hodges thinks egregious pay packages may have more to do with oversized egos than any real challenges that come with occupying the corner office. He points out that Sun Microsystems’ McNealy, for example, earns 32 times President Bush’s annual $400,000 salary. “Their pay doesn’t have anything to do with the level of responsibility. And it doesn’t seem to have anything to do with how well they run their companies, either,” says Hodges. It’s getting worse, by some measures. The ratio of CEO compensation to pay for the rank and file was roughly 200-to-1 in the early 1990s. Now it's more than 450-to-1, says David Lewin, a professor at the UCLA Anderson School of Management. Worse, many average workers are now paid partly through bonus systems and stock options, meaning their livelihoods are tied to often-volatile company stocks. Many executives have similar incentives, but at a vastly greater scale. They win almost regardless of how their stocks fare. Boards gone badDoes this really matter to investors? You bet. The Hodges fund is up 35% a year, annualized, over the past three years. Hodges chalks up his good results in part to the fact that he deliberately avoids companies where there’s little connection between CEO pay and performance. There is some logic to this. “When you have a breakdown in the executive compensation process in which CEOs are receiving undeserved pay, it is an indication that there is a power imbalance in the boardroom,” says Brandon Rees, a research analyst with the AFL-CIO Office of Investment, which keeps a close eye on executive pay. “When you have a weak board of directors, that is where you have broader corporate governance breakdowns which can include accounting fraud," says Rees."The problems at Tyco International (TYC, news, msgs), Enron and WorldCom were all preceded by excessive executive compensation packages. They were a red flag for investors.”Weak governanceNo one is suggesting the companies on our top-five overpaid execs list are committing accounting fraud. But a few companies on our list get weak to lousy grades for corporate governance. Unfortunately, all but Bristol-Myers declined to talk with us.

Sanmina-SCI's corporate governance is worse than 93% of other companies in the S&P 500 ($INX), according to Patrick McGurn, special counsel for Institutional Shareholder Services, which advises institutional investors on proxy voting and corporate governance issues. Sanmina-SCI gets low grades for having a poison-pill anti-takeover mechanism. That protects management and the board, taking away an important shareholder tool -- the threat of an outside buyer -- for trying to fix problems like excessive pay.

Bristol-Myers’ board gets an “F” from the Corporate Library -- in part because of excessive pay that is not linked to performance, but also because groups of board members get voted on as panels in different years. Known as a “staggered board,” this makes it harder for shareholders to quickly kick out a board they don’t like. Bristol-Myers says it is taking steps to link executive pay to performance. The corporate governance watchdogs at ISS agree. But the company still has a long way to go, says Hodgson of the Corporate Library.

Ciena has lousier corporate governance policies than 95% of the companies in the S&P 500, says ISS. The company gets low grades for excessive options to top execs, a poison pill and a staggered board. Albertson's and Sun Microsystems are more friendly to shareholders, but you can’t really say they are shining examples. Each has better corporate governance than about half the companies in the S&P 500, says ISS.ISS gives Sun Microsystems credit for paying McNealy a minuscule base salary of just $100,000 from 2002 to 2004, at the low end of the scale for CEOs. It also says the board has done a commendable job of structuring McNealy’s compensation to focus on annual bonus and long-term incentives. Even so, last year McNealy took in over $7 million by exercising stock options, and the board granted him another $1.5 million in options.A better wayCan investors do more than vote with their feet? Activist shareholders sometimes fight overly generous pay. The AFL-CIO, for example recently submitted a proposal to Albertson’s shareholders asking for more performance-based pay. Another approach is to simply look for companies that have great performance and reasonably paid leaders. That’s a sign that boards and top managers feel a responsibility towards shareholders. Some examples:

Ceradyne (CRDN, news, msgs) paid CEO Joel Moskowitz an average of just $766,000 over the past three years, while Ceradyne's stock shot up 924%. The company makes ceramic components used in technology.

Whole Foods Market (WFMI, news, msgs) paid CEO John Mackey an average $645,000 a year over the past four years, while the stock gained 308%.

Jo-Ann Stores (JAS, news, msgs) paid CEO Alan Rosskamm $1.6 million a year over the past four years. The stock jumped 611%.

Hibbett Sporting Goods (HIBB, news, msgs) paid CEO Michael Newsome $969,000 a year over the past four years as Hibbett shares soared 553%.

Digi International (DGII, news, msgs) paid CEO Joseph T. Dunsmore $744,000 a year over the past three years while the stock advanced 320%.One sign of these companies' investor-friendly nature: Ceradyne, Whole Foods and Jo-Ann Stores use performance-based options and stock grants, says Hodgson. Jo-Ann Stores, he says, "is an example of a company that has so much faith in its executives, the board is willing to tie their long-term compensation even closer to performance.” Many of these companies are much smaller than the five on our worst-paid CEO list. So you might expect CEO salaries to be lower. But from an investor’s point of view, does that really matter when you are making 500% on a stock in four years instead of losing 93%?

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.