H-P's Hurd's Expenses Have Been Troubling for 3 Years Now

Last September, I wrote about how Mark Hurd had consistently racked up high personal expenses he was charging off to HP shareholders. It was a warning-sign then and today his actions caught up to him. Here is that September article from TheStreet.com:

By Eric Jackson, Senior Contributor09/23/09 - 06:00 AM EDT

• 27 Comments
• Add Comment

Stock quotes in this article: HPQ , DELL

NEW YORK (TheStreet) -- Mark Hurd was brought in to take the helm at Hewlett-Packard(HPQ) 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 compensationreached $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), 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.

Sphere: Related Content

A Closer Look at Executive Compensation

By Eric Jackson
From RealMoney.com
11/13/2009 1:59 PM EST
Click here for more stories by Eric Jackson

We read a lot about corporate governance and executive compensation these days, in the wake of last year's economic collapse. Many politicians are now jumping into the fray, saying we need to legislate certain governance requirements, such as splitting the roles of CEO and chairman or lowering CEO pay. Although philosophically I support many of these arguments, it turns out that many of these prescriptions have no long-term relationship with an increase in a company's stock price. Which of these governance and executive pay factors should you pay attention to as an investor?

As any good investor knows, there's no silver-bullet metric (such as P/E ratio or price-to-book or leverage ratio) that, on its own, predicts a stock future increase or decrease. Even if you take a number of internal factors into account, your perfect analysis can be thrown out the window by an industry downturn or some random comment by Tim Geithner on his trip to Asia.

With this in mind, I believe you can improve your investment batting average by paying attention to two factors relating to corporate governance and executive compensation that most people overlook.

Two Kinds of Insider Stock

First, how much stock do the company's directors own? In a big long study I took part in several years ago, we scoured company's proxy statements and examined how a bunch of so-called "good" corporate governance factors were actually linked to longer-term stock returns. Almost all of them (such as whether there was a split CEO and chairman, or if the board had a number of "independent" directors or not) had no correlation with stock price increases. However, we found one variable that had a whopping link: whether a company had a lot of directors who had dug into their own pockets and actually bought stock in the company. This is different from a case in which stock ownership in the company was only due to stock grants or stock options.

When we talked to directors about this finding, they said it didn't surprise them. It's the difference between having "found money" on the line (i.e., their stock was paid for from other people's money, not theirs) instead of their own. One director said, "I sit on a lot of boards right now, but there's one where I've got about $250,000 of my own money on the line. It sounds bad to admit it, but I care a heck of a lot more about how that company does. I lose sleep over it."

If you were a shareholder in that company, his sleepless nights are probably comfort to you. I bet there are many Bank of America (BAC - commentary - Trade Now) and Citigroup (C - commentary - Trade Now) shareholders wish they'd had more directors losing sleep (and their own money) a couple of years ago.

Payments to the Chief

The second characteristic I like to look at is the total compensation the CEO and his/her management team take home. Is it significantly above other companies in that industry, even though the stock returns between the companies over time is not different? If so, that's a big red flag. Why does this management team (and the board members who approve their pay packages) think they're worth so much more than their peers, with no commensurate better historical track record?

As part of total comp, you should also look out for extreme executive perks that have been thrown in to supplement an executive's already high salary. I mentioned recently a Las Vegas Sands (LVS - commentary - Trade Now) senior vice president, Rob Goldstein, who got the company to pay $364,000 to remodel his home and never had to pay it back. Mark Hurd and his senior management team at Hewlett-Packard (HPQ - commentary - Trade Now) saw their total compensation double last year, after they imposed 10% to 15% pay cuts across the organization. The H-P execs also get to spend hundreds of thousands of shareholders' dollars jaunting around the country on the H-P corporate jets for personal use, with hotels and meals also covered for personal use.

I've heard some people say, "Who cares about the perks? Shocking that there's gambling going on in the casino. Come on." I disagree. Not every CEO or management team does this. It says something about how they approach executive decisions. To me, it tells me that they will look for every chance to make decisions that benefit them first and foremost before the shareholders. I don't want to invest in a company like that. (Maybe not surprisingly, I currently have short positions in LVS and HPQ because of many factors, but the perks factor certainly played a role in my decision.)

So how do you find this information? It's easy: go to the SEC's Web site. Search "company filings" and look for the company's most recent proxy statement. Its technical filing name is "DEF-14A," which stands for the company's definitive proxy statement. In there, you will find info on who is on the board of directors, how much they're paid, their bios, and how much stock they own in the company. It's not always immediately obvious how much of their current stock ownership is from past stock grants and stock options given to them (for free) vs. how much they've bought themselves, but it can be figured out if you look over a number of these past filings.

In the same filing, you'll find everything you've ever wanted to know about how much in total comp the management team is making (and more), down to the often most illuminating footnotes. The SEC is often tinkering with its requirements on companies in how they present this data. However, the current version makes it clear what each exec's total comp is.

These two characteristics of outside directors' stock ownership in their companies and the size of CEO total comp and executive perks aren't silver bullets. They should supplement all the normal financial analysis you do. However, they can often be very helpful in deciding whether to proceed with an investment or not.

At the time of publication, Jackson's fund held a net short position in LVS and a short position in HPQ. 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

It’s Time to Champion Real Free Market Capitalism

By Eric Jackson

November 10, 2009

Market commentators and the White House have been quick to blame last year’s economic meltdown on a free market run amok. And they’ve used that false assumption to justify their unprecedented response of government intervention and increased regulation.

But we’ve never really had free market capitalism in this country. The last 30 years of America’s market system is better described as “mixed crony capitalism” – one part capitalism, one part government intervention through various programs, and one part corporate cronyism where officers and directors of big businesses pay themselves more, lobby politicians on both sides of the aisle and gain more power through favorable governmental regulations including mergers.

In such a three-way shared system, it shouldn’t surprise anyone that true free market capitalism always appears to be outnumbered by the interests of the government and corporate cronies.

For example, despite the billions in taxpayer dollars that have helped prop up a slew of “too big to fail” banks, and unprecedented government ownership of them, the powerful bank lobby has somehow convinced the current administration that little needs to be changed about how those banks operate. It’s as if the bankers and politicians are saying “let’s just call last year a mulligan and move on.” Not surprisingly, most of the CEOs and directors the banks that drove their institutions over a cliff are still in place.

If Standard Oil or Ma Bell existed today, it’s hard to imagine there would be the political will to break them up. Instead, politicians and their corporate donors would argue that what’s good for Ma Bell, GM, Bank of America, Citibank, or any other company is good for America. Politicians would never support programs that curtail spending, because it would give them nothing to go back home and talk about to get them re-elected.

There are many critical thinkers arguing why even more government intervention is needed today than ever before. Unfortunately, there are no critical thinkers arguing why our system needs more emphasis on free markets with clear “rules of the game” and less state involvement in our economy and less protections for corporate cronies. This paucity of ideas is something that greatly troubles me and other investors I know.

Milton Friedman and Ayn Rand are no longer around to argue for their vision of free market capitalism. Instead, we only hear alarmist libertarian rantings of Ron Paul or populist sloganeering to “keep the government out of our business” providing no clear direction for what changes should take place.

We need a renewed focus on the ideas of individual choice championed by Friedman and Rand. Both argued for a free market system built by entrepreneurship and small business and against abuse of power by “robber baron” CEOs. Government’s role in their eyes should be limited to police, defense, and the legal system. The importance of a market system following enforced rules is critical. The ideal market system the US should be striving to attain here is not Russia but Hong Kong.

The economic problems are country face are great, but they won’t improve by further deteriorating our federal balance sheet by short-term spending and tax breaks. Instead, we need to:

· reduce excessive government spending and restore fiscal balance to the federal and state governments

· break up companies that are “too big to fail” including the big banks

· force over-leveraged banks to undergo debt-to-equity conversions that allow them to get credit out to real entrepreneurs sooner

· bring back Glass-Steagall that separates commercial and investment banks,

· prosecute insider trading and other white collar crimes when they occur,

· get the government out of the business of setting executive pay in favor of giving shareholders more direct powers to remove directors not doing this appropriately and

· eliminate special tax breaks for homeowners and cars which only prolong the pain of an inevitable correction until later.

The heroes of free market capitalism are the entrepreneurs who create real value and real businesses. Those people are the antithesis of “fat cat” capitalists who ensconce themselves in money, power, with government protection. We need more people championing well articulated pro-market, pro-entrepreneurship policies in Washington.

Eric Jackson is Founder and Managing Member 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

Yahoo!'s Defense of CEO Stock Sales Is Lame

By Eric Jackson 10/14/09 - 06:01 AM EDT

Stock quotes in this article: YHOO , MSFT , ADSK

NEW YORK (TheStreet) -- Yahoo!'s(YHOO Quote) responses to recent criticism of CEO Carol Bartz's stock sales have completely missed the point and appear designed to obfuscate. If she wants to show real leadership, she needs to stop misleading shareholders.

Let's review the recent controversy. Last month, I noted how Yahoo!(YHOO Quote) officers and directors sold $233 million in company stock but purchased only $103,000 worth of shares over the past two years. This was all spelled out in Securities and Exchange Commission filings.

I created a simple spreadsheet tabulating the sales and purchases and published it online. It quickly drew the attention of the media, which primarily focused on how new CEO Carol Bartz has sold almost $2 million in stock in her first five months on the job.

Since then, Bartz denied that she sold anything -- once on CNBC and once at the New York press event at which she launched Yahoo!'s new $100 million marketing campaign.

These sales were not open-market sales but related to the vesting of restricted stock units (RSUs) Bartz received from Yahoo! in 2009 as part of a $10 million "makeup grant" designed to compensate her for options she left on the table when she left her part-time executive chairman role at Autodesk(ADSK Quote) to take the helm at Yahoo! in January.

Bartz's initial tactical response to the criticism about the stock sales seems to have been: "Damn the filings, I'm going to deny, deny, deny." Perhaps she thought that if she denied it forcefully enough, the issue would just go away.

Yahoo!'s public relations team has taken a more nuanced approach. In response to questions from the Guardian and CNBC about the issue, they explained that the sales were due to taxes Bartz owed on the vested stock. Therefore, they suggested, these weren't "real" stock sales and were no cause for alarm for investors.

These responses fail to address the real issue, though. I've never said these are open-market sales, although they certainly qualify as sales (as the SEC filings show). And I have criticized Bartz for not digging into her own pocket to pay the taxes owed on the vested stock instead of selling parts of those stock grants to do so. Obviously, I can understand why more junior employees choose to sell vested stock to pay their taxes, but senior executives like Bartz have the money to easily cover their tax bills. I'm assuming Bartz thinks her actions as CEO can help Yahoo!'s stock go up in the future. In order to show her confidence in her own leadership -- and in Yahoo! stock -- she should pay the taxes herself and keep all of her vested shares.

Last week, I highlighted in a blog post that Bartz sold another $1.3 million at the end of September, again selling some of those third-quarter vested shares that were part of her "makeup grant" in order to pay her taxes.

Yahoo!'s public relations team objected to this latest post from me, calling my assertions on this and Bartz's other sales "inaccurate and misleading." They pointed out Bartz didn't make an open-market sale. I never said she did. They noted that Bartz's "makeup grant" was previously disclosed. That's what I said in my prior criticisms. They stated that the company "currently" withholds a portion of vested stock in order to pay taxes for "all" employees receiving vested stock because it is "practical" and added that "many companies" do the same. As I've said before, if Carol Bartz wanted to pay her taxes on this vested stock so she could keep all the Yahoo! stock possible, would some human relations bureaucrat at the company have told her no?

As a follow-up, Yahoo!'s public relations team was asked to point to the previously disclosed filing showing that Bartz was required by Yahoo! not to pay taxes herself on the vested stock she received from the company as part of her "makeup grant." In response, Yahoo! pointed to the company's 10-K filing made last February and specifically referred to exhibit 10.17(D) in that filing.

The exhibit lays out the specific terms of the employment agreement that Carol Bartz negotiated with the company relating to stock grants she is to receive. Indeed, the exhibit states that Yahoo! will withhold some of the vested stock to pay Bartz's taxes. However, that same section goes on to say that "[i]n the event the Company cannot (under applicable legal, regulatory, listing or other requirements) satisfy such tax withholding obligation in such method", Yahoo! might have to require Bartz to "pay such amount in cash or check."

There's nothing in this exhibit that says Bartz couldn't pay her own tax bill herself on the grant if she wanted to, in order to keep all her vested stock. Indeed, it's interesting that Exhibit 10.2(F) in the same filing, which refers to situations where all employees (not just Bartz) exercise their stock options and owe taxes, says Yahoo! requires them to pay the tax bill. This can be done by selling a portion of their exercised stock options or paying "cash or check" out of their own pocket. This latter option is exactly what I argued Bartz should have done -- from a leadership perspective -- with respect to her "makeup grant."

My comments about Bartz' stock sales and her egregious pay package, which was approved by Yahoo!'s compensation committee in January, have been neither inaccurate nor misleading. From a shareholder's perspective, Bartz shouldn't have sold these shares in order to pay taxes on them. To demonstrate her belief in the long-term value of the shares, she should have paid the tax bill herself.

The group deserving the most blame in this compensation debate is, of course, Yahoo!'s compensation committee, which signed off on Bartz's employment contract. The committee is chaired by Art Kern and has members Ron Burkle and Frank Biondi, Carl Icahn's right-hand man. They should be ashamed of the following aspects of Bartz's employment agreement:

1. If Bartz sticks around for four years and maxes out her possible annual bonuses and if Yahoo!'s stock price trades for more than $25 for 20 consecutive trading days before February 2016 -- seven years from now -- she will receive a total compensation package for her four years of work of $187 million. Although Yahoo!'s stock was trading around $12 when she took the job at the start of this year, is it really that much of a "stretch goal" for Bartz to get Yahoo!'s stock above $25 for 20 straight trading days in the next seven years? After all, getting the stock back to $25 would bring it to a level that's still 20% less than what Microsoft(MSFT Quote) offered to pay for the whole company 18 months ago. This would be a lot of money for a relatively low hurdle. I'm all for executives making money for performance, but not easy money.
2. They gave Bartz a $10 million "makeup grant" in cash and stock for options she left on the table at Autodesk when she signed her Yahoo! employment contract in January. However, according to SEC filings, Bartz's remaining Autodesk options were only worth $3.3 million at that time. Why did Yahoo!'s compensation committee triple the size of the "makeup grant"?
3. When Bartz is getting a potential $187 million for getting Yahoo!'s stock back to $5 less than Microsoft's buyout offer, isn't Bartz being sufficiently "made up" for the Autodesk options she left behind? Does she need a "makeup grant" on top of all her other compensation? Most reasonable executives would conclude that getting $187 million was better than $3.3 million. This "makeup grant" was padding and should never have been given in the first place.
4. Why did Yahoo! agree to pay the taxes on Bartz's RSUs related to her "makeup grant" that she receives this year? Bartz would have had to pay her taxes out of pocket on her $3.3 million of remaining Autodesk stock options. Why should Bartz now pay taxes for a $10 million grant out of that grant, and not out of her pocket?
5. Why did Yahoo! agree to pay Bartz "up to $140,000" for the financial advice she received as part of negotiating her employment contract? This was a great perk for her, but not for Yahoo!s shareholders. Yahoo!s public relations team or Bartz have yet to account for this slap in the face to shareholders.

A majority of Yahoo!'s board deserves to be replaced for so poorly negotiating the potential buyout of the company by Microsoft. All of the members of the compensation committee deserve to be replaced for overpaying Bartz's predecessor, Terry Semel, and for approving Bartz's contract.

But let's be clear: Bartz is no babe in the woods. She's been around the block negotiating employment contracts and knew exactly what she was demanding. Her compensation, perks and tax gross-up demands are excessive. She should immediately pay back Yahoo! shareholders the $140,000 for the high-priced advisers she used to negotiate her employment contract. She should also show her shareholders and employees that her heart is in the right place when it comes to this company's future.

To that end, I call on Bartz to spend $25 million of her own aftertax income on open-market Yahoo! stock purchases. She can keep her $187 million for getting the stock back to a 20% discount to the Microsoft offer, but let's see her put some of her money where her mouth is -- and actually at risk.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund had a long position in MSFT.

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

Carol Bartz Sold Another $1.3 Million of Yahoo! Stock Last Week

As predicted last month, when I first raised this issue, Yahoo! disclosed late Friday that Carol Bartz had sold another $1.3 million of Yahoo! stock at the end of September. This brings her total Yahoo! share sales for the year to $3.3 million.

When I first brought up this issue of how she and several other Yahoo! insiders had dumped shares over the past 2 years, Bartz went on CNBC and flat-out denied that she'd sold any shares.

She later reaffirmed at the press conference announcing Yahoo!'s new $100 million marketing campaign ("It's about Y!ou") that she'd never sold any shares.

I don't understand why she has decided to take this strident denial approach, when her SEC filings clearly show she disposed of (i.e., sold) her shares.

These sales all have to do with a "Make-Up Grant" Yahoo!'s board gave to Carol as part of her employment agreement she signed with the company. They agreed to give her $10 million worth of cash and Restricted Stock Units (basically Yahoo! shares) in blocks each quarter for her first year (2009) on the job to make her whole for the Autodesk stock she left on the table to take the Yahoo! CEO job.

No one has ever explained why Yahoo!'s board decided to give her a $10 million "make-up grant" when, according to SEC filings, she was only leaving Autodesk stock and stock options worth $3.3 million at the time she signed the deal.

Every quarter, when Carol gets her cash and stock from Yahoo! for this inflated "Make-Up Grant," she owes taxes on it. What is unusual about Carol compared to other senior executives who have been well-compensated through the years is that, rather than pay her tax bill herself, she has decided to dump part of her Yahoo! shares every quarter to pay those bills.

If I was an employee or shareholder, I would be disappointed that Bartz didn't want to keep every single share of Yahoo! stock she possibly could -- because I would think she anticipates that the price is going to go through the roof in the months and years to come.

How do I know Carol has enough cash in the bank to pay these tax bills herself? In 2007 alone, she exercised options at Autodesk worth $47 million. That's just that one year. Of course, she has enough.

It comes down to a question of leadership. When she had the choice to demonstrate her desire to keep all the Yahoo! stock that she negotiated so hard to get, she decided that she would rather keep her existing cash in the bank, than keep a few more hundred thousand shares of Yahoo! And then, to go on about how she never sold stock, and get Yahoo! PR to say this is done all the time -- when it's not, by real leaders -- that's bush league.

Sphere: Related Content

eBay Must Wring Out CEOs' Excess

By Eric Jackson 09/30/09 - 06:00 AM EDT

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.

Sphere: Related Content