Wednesday, September 30, 2009

eBay Must Wring Out CEOs' Excess

Stock quotes in this article: EBAY , HPQ , YHOO , MSFT , AAPL , CSCO

NEW YORK (TheStreet) -- I've recently criticized Yahoo!'s (YHOO Quote) Carol Bartz and Hewlett-Packard's (HPQ Quote) Mark Hurd for excessive pay and perks, given their companies' performances.

My focus on Silicon Valley gluttony would be incomplete without discussing the perks at eBay(EBAY Quote).

After founding eBay in September 1995 and overseeing all aspects of the business for the first three years, Pierre Omidyar decided he had a tiger by the tail and needed some professional management. He hired Meg Whitman, a Harvard MBA with stints at Bain, Hasbro(HAS Quote), FTD, Walt Disney(DIS Quote), Procter & Gamble(PG Quote) and Stride Rite, as CEO in March 1998. The company went public six months later and has been a runaway success.

eBay is an incredible entrepreneurial story. Omidyar and his first employee, Jeff Skoll, deserve countless wealth for creating a multibillion dollar company from nothing. Along the way, Skoll -- who no longer holds any eBay stock -- cashed out equity worth $5.3 billion. Omidyar, still chairman, has cashed out about $3.5 billion to date, but his remaining equity stake is worth another $3.8 billion at current market prices. He now lives in Hawaii and is a philanthropist. And with as much wealth as they've created for themselves, Omidyar and Skoll have created more for others and should be celebrated for this success.

Whitman, who stepped down as CEO last year and now has ambitions to become governor in California in 2010, had a net positive record overseeing eBay. She rode a rocket ship of growth -- getting through the early days of frequent Web site crashes -- and ultimately got it to be a $60 billion company in late 2004; it's about half that valuation today.

Yet Whitman's final years at eBay leave her open to criticism. She promoted a drunken-sailor approach to acquisitions, always overpaying and making little effort to stitch them together. A culmination was the $4.1 billion purchase of Skype in 2005 (including all payouts), in which she took an auction and e-commerce site into the phone business.

Potentially more damaging in the long-run for eBay than overpaying was that Whitman didn't get the intellectual property associated with Skype. This has allowed Skype's founders to now come back and sue eBay for trying to unload the property recently at a valuation of $2.75 billion.

Although Whitman hasn't done as well as Omidyar and Skoll, she's been well-compensated for her time as CEO. According to filings with the Securities and Exchange Commission, Whitman was paid $47 million in total compensation between 1998 and 2008. Additionally, she sold eBay stock during that time worth about $732 million. She still owns stock in the company as of the end of last year worth another $500 million at today's valuation, as well as additional stock options that will have renewed value if eBay's stock gets above $31.

I believe Whitman deserves every nickel of compensation and stock sale proceeds she got between her joining the company in 1998 and Jan. 1, 2005. Since then, however, eBay has been in a tailspin with the stock down 59% vs. a Nasdaq decline of 3% over the same period. eBay's new CEO John Donahoe was hand-picked by Whitman because he used to work with her at Bain. He has spent the first two years on the job trying to give the company some sense of focus and direction, which it lacked under his predecessor.

Something happened in Whitman's last four years on the job in which her pay became dramatically disconnected with eBay's stock price and her perks started to go through the roof.

Based on my review of the company's SEC proxy filings, it appears that there were two big clues for investors that suggested, between 2005 and 2008, Whitman's interest had drifted away from increasing the stock price of eBay to increasing her cash compensation and perks. Had anyone seen these clues -- and, interestingly, perhaps Skoll did as he liquidated his entire eBay stake in 2006 -- they might have pulled the ripcord on owning the stock in 2006 or 2007 when it was trading at $35, before the bottom fell out in the stock and it hit its nadir below $10 this past March.

The first big clue that Whitman's eye was no longer on the ball as CEO had to do with her total annual compensation spiking in the last two full years of her tenure, even as eBay's stock price continued to decline. Peaking at $58 at the start of 2005, eBay's stock price dropped 43% over the next three years. Over that same period, Whitman's total annual compensation almost quintupled to $13.9 million from $2.9 million.

Meg Whitman's Total Annual Compensation

SEC Filings

One of the interesting coincidences, and perhaps not a coincidence at all, about the above figure is that Whitman's annual compensation is remarkably modest from 1998 through 2002. Over that time period, she averaged total annual pay of $412,000. During that time, there were three members of eBay's compensation committee: Philippe Bourguignon, ex-CEO of EuroDisney; Bob Kagle, general partner of Benchmark Capital and early eBay investor; and Howard Schultz, the Starbucks(SBUX Quote) founder who also is a venture partner in Maveron, an early eBay backer.

At the end of 2002, Schultz left eBay's board and compensation committee. He was replaced by Tom Tierney. Tierney was formerly the CEO of Bain Consulting and, indirectly, Whitman's old boss. Tierney would pass any stock exchange definition of an "independent" director. But for those of us who live in the real world, it is obvious that Whitman had a new friend on the small group deciding how she would be paid.

It should come as no surprise then that this committee immediately started loosening the purse strings, and for the years 2003 to 2007, just before she resigned, Whitman's total annual compensation averaged $7.6 million.

The second big clue that Whitman was no longer as focused on eBay's fortunes in her final four years as CEO was the amount of time she spent flying around the world on personal business in eBay's corporate jet, which was paid for by eBay shareholders.

As the chart below illustrates, eBay's compensation committee (again perhaps indirectly linked to Tierney's arrival) went from a practice of not granting Whitman any personal air travel on the corporate jet paid by the shareholders to almost $1 million a year in her final two full years on the job.

That $1 million includes tax gross-ups, meaning shareholders also paid Whitman's taxes on the benefit she received of making all those flights instead of the billionaire paying her taxes herself. These two years of lavish perks coincided with a time when eBay's stock dropped 22%, even though Nasdaq was up 17% in the same period.

Meg Whitman's Personal Aircraft Costs Paid by EBAY Shareholders

SEC filings

I took H-P's Hurd to task last week for spending almost $150,000 last year on personal air travel in H-P's jet and charging it to his shareholders.

So, I'm just flabbergasted seeing that Whitman spent more than $1 million on personal air travel in 2006. How do you do that? And how does Whitman and eBay's compensation committee justify trying to brazenly sneak that large expense report past shareholders, especially when the stock is tanking during the ginned-up, credit-fueled boom of 2006?

I don't follow California politics -- although I'm a fervent supporter of free market capitalism as advocated by Milton Friedman -- but I find it highly ironic and disingenuous of Whitman to portray herself now as a populist based on her time at eBay. According to a glowing Fortune profile of her political ambitions last March, the only "dirt" her critics have been able to dig up on her is that she voted in only half the elections for which she was eligible in the last decade. She explained it this way: "I was head down, building eBay, with two teenage sons and a neurosurgeon husband, and traveling half the time."

She was certainly traveling half the time -- for personal vacation jaunts, all paid by eBay shareholders.

In the last two years, perhaps self-conscious at just how embarrassing these numbers were, eBay decided to break up the personal air travel perks into two categories: purely personal travel and travel to outside board meetings. Whitman was on the boards of Procter & Gamble and DreamWorks Animation (DWA Quote) in the last two years of her tenure. So some of her million-dollar expense went to shuttling her to L.A. and Cincinnati several times a year for these meetings.

I can understand why eBay burnished Whitman's personal network to serve on those boards and rub shoulders with Steven Spielberg and other luminaries, but how did serving on those boards help eBay shareholders? They say that While Rome burned, Nero fiddled. At eBay in 2006, while the stock dropped and the Skype merger was a mess, Whitman flew to Hawaii and other locales on a private jet paid for from the shareholders' bank account.

So, a question to the eBay compensation committee: Who do you think you are? With the exception of H-P, no other tech company foists off this extravagant perk on its shareholders. Microsoft(MSFT Quote), Cisco(CSCO Quote), Intel(INTC Quote) and Apple(AAPL Quote) don't do it. Even Yahoo! -- the king of excessive compensation -- doesn't do this. What makes eBay so special?

Most troubling about this "CEO entitlement mentality" that Whitman adopted in her final years on the job is that she's passed the habit on to her successor. Donahoe racked up almost $280,000 worth of personal aircraft expenses in his first nine months on the job in 2008. I can't wait to see what he can do this year with a full 12 months.

I doubt he's ever had to answer to why he's indulging himself in this ridiculous expense. If asked, I suspect he'd look blankly ahead and say something like, "Well, Meg said it was OK."

It's time for eBay to grow up and stamp out these excesses. Just because you've always done something dumb doesn't mean you should keep doing it. Make your well-compensated execs pay their own way on personal trips using the corporate jet, and start linking pay for performance. Donahoe made $13.1 million last year for his nine months as CEO, while eBay's stock dropped 55%, far wider than Nasdaq's 30% loss in that same period.

eBay's board, particularly its compensation committee, needs to turn the page on the Meg Whitman era and get its executives focused on the tough task at hand in turning around the company instead of worrying about their next tee time.

-- Written by Eric Jackson in Naples, Fla.

t the time of publication, Jackson had no positions in the stocks 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.

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