By Eric Jackson 09/23/09 - 06:00 AM EDT
Stock quotes in this article: HPQ , DELL
NEW YORK (TheStreet) -- Mark Hurd was brought in to take the helm at Hewlett-Packard(HPQ Quote) in 2005.
He's well regarded by Wall Street for turning the company from a bureaucratic has-been to a market leader again. In the first 2 1/2 years of Hurd's tenure as leader, H-P's stock increased 137%. For the last two years, however, H-P's stock performance has been mediocre, dropping 5%. Although that was better than the Nasdaq, it tracked that index very closely over that period.
While Hurd deserves credit for turning this company around in the early part of his tenure by slashing costs and increasing focus, there are some very troubling aspects about how he, his management team and his board approach executive compensation and governance that suggest investors should steer clear of this Silicon Valley icon until it gets its act together.
Although H-P's performance has hit the wall in the past two years, Hurd's pay -- and the pay of his management team members -- has dramatically increased. For 2008, Hurd's total compensation reached $43 million, which made him the fourth highest paid CEO in America for 2008. Hurd's total compensation increased 73% from his $25 million in 2007, even though H-P's stock price declined 29% in 2008.
On his senior management team, the sharp compensation increases in 2008 were also noteworthy. CIO Randy Mott's total compensation went up 400% last year to $28 million. Imaging EVP VJ Joshi's total compensation jumped 83% to $22 million. Personal Systems EVP Todd Bradley's total compensation jumped 263% to $21 million. Technology Solutions' EVP Ann Livermore enjoyed a 31% bump in total compensation to $21 million. And CFO Catherine Lesjak got a 49% increase in total compensation to a more modest $6 million.
What also raises eyebrows about these sharp executive raises, aside from it happening in the face of a sharp stock price drop for the year (and the general market uncertainty which remained at the end of the year), is that 2008 was also a year in which these same leaders imposed mandatory 10% pay cuts for other executives and 5% cuts for the rest of H-P's workforce. It hardly seems like this select group is shouldering the pain like the rest of the employees.
At Dell(DELL Quote), the magnitude and the general direction of total compensation were far different than H-P for 2008. Michael Dell's total comp dropped 9% in 2008 from the previous year to $2 million. Other senior executives on Dell's management team decreased or modestly increased to an average total compensation for the year of $9.5 million -- or less than half of what their H-P counter-parts took home for the year.
But what should be most rankling to H-P shareholders -- and a very good reason to avoid the stock in the near term, as it speaks to the values by which this board and management team operate -- are the perks these executives are asking for and receiving from the board.
For example, last year H-P shareholders paid $7,472 for travel expenses related to Mark Hurd's family accompanying him to business meetings. Expenses for Hurd's security service roughly doubled to $256,000. Shareholders paid $500,000 combined in 2007 and 2008 for legal fees associated with bringing over CIO Randy Mott from arch-rival Dell. All senior executives availed themselves of about $18,000 worth of financial advice in 2008 (about four times the amount Dell senior executives received that same year).
Perhaps the biggest bonus for being an H-P senior executive is getting access to the fleet of corporate jets for personal use. Shareholders forked over $136,000 for Mark Hurd's personal use of the aircraft in 2008. Todd Bradley's personal use of the aircraft cost $128,000 in 2008, which was actually down from $327,000 worth of personal travel in 2007.
H-P explains in its proxy filing that for "purposes of reporting the value of such personal usage in this table, H-P uses data provided by an outside firm to calculate the hourly cost of operating each type of aircraft. These costs include the cost of fuel, maintenance, landing and parking fees, crew and catering and supplies."
I think it's completely unacceptable for shareholders to pay for this personal use perk. However, this explanation left me with more questions about these numbers. Who is this outside firm that provided this estimated hourly cost? What in fact was the hourly cost? How do shareholders know that the hourly cost was a fair market rate? Finally, what were these personal trips?
I'm not even sure how it's possible for Todd Bradley to have racked up $327,000 worth of personal travel in 2007. Did he have time to show up for work that year? Call me a conspiracy theorist but isn't it possible that this outside firm vastly under-stated the actual (fair market) hourly cost of using these aircraft for personal use? How will shareholders actually know unless the company releases the flight logs and numbers?
Dell and his senior executives charged no personal use of their aircraft to its shareholders.
A later footnote in the proxy filing for Hurd's personal travel says that the first 25 hours of personal travel are included and are "grossed up." Hurd owes taxes on the value of that perk, but H-P's board has decided that HP shareholders should pay Hurd's taxes instead of Hurd.
The same footnote later says that if Hurd's spouse is "requested by H-P" to travel with Hurd, then the company "grosses up" that amount, too. The internal process that goes on in determining the company request is not described. It could be as simple as Mark Hurd leaning over and saying to his assistant: "I'd like to go play golf in Hawaii this weekend with the CEO of one of our clients on business. Can you write me a quick email saying that, on behalf of H-P, you're requesting that my wife fly with me?"
And don't forget the minor scandal the erupted last January, when blogger Michelle Leder of Footnoted noticed that H-P had "grossed up" Hurd $79,814 for taxes he paid on meals involving his family. (Ann Livermore and VJ Joshi also got "grossed up" $10,000 apiece for meals with their families.)
Michelle estimated that, to receive a "gross-up" of this amount, Hurd and his family would have had to run up food bills during the year of more than $243,000.
H-P protested, saying it had made an error in its calculations and even refiled its proxy with the SEC. Magically, Hurd's "gross-ups" for his family meals shrunk to $3,285.
H-P's error and refiling could have simply been a decision on its part, based on the angry reaction of employees and shareholders, for Hurd and all executives to simply cover these meals and their taxes themselves. Let's face it: It wouldn't have been a hardship for any of them based on their compensation last year.
I don't mind pay for performance. I do mind pay for non-performance and I mind perks for breakfast, lunch, and dinner. And in a year of across the board pay cuts? Where is their shame?
The board is equally or more to blame of course. After all, they approved all this. I was particularly surprised to note that Ken Thompson has served on the HP board for three years now. Thompson is one of the most disgraced CEOs coming out of the financial crisis.
He ended up destroying the fifth largest bank in America, Wachovia, by pushing it heavily into the area of subprime mortgages. When you destroy a company with $8 billion in annual profits, you shouldn't have the right to continue serving as a director and get $300,000 a year for doing so.
It was announced last week that Web pioneer Marc Andreesen would join H-P's board. I hope he can help reform the company's governance, but I don't think it's likely. In 2006, Andreesen sold his company Opsware to H-P for $1.6 billion -- making him indirectly beholden to Hurd and the rest of the board for his payday. That means Andreesen will likely be another voice around the table tacitly approving whatever Hurd wants to do and pay himself.
-- Written by Eric Jackson in Naples, Fla.
At the time of publication, Jackson did not hold any positions in the companies mentioned.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.
Sphere: Related Content