Morgan gets a raise. That's nice, but don't you think your construction workers deserve a raise too? Jeff
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Applied Materials Gets a Bargain in Chief Executive Morgan: Graef Crystal
By Graef Crystal
(Graef Crystal, author of ``In Search of Excess' and other
books on executive compensation, is a columnist for Bloomberg
News. His opinions don't necessarily reflect those of Bloomberg
News.)
Santa Rosa, California, Feb. 24 (Bloomberg) -- How can a
chief executive get a fivefold pay raise and still be a great buy
for shareholders?
Answer: Start with being wildly underpaid for years and add
a record of knocking the first pitch over the centerfield fence
every time you come to the plate.
The executive who fits that bill is James C. Morgan of
Applied Materials Inc., the biggest semiconductor equipment
manufacturer.
Morgan has been CEO of the Santa Clara, California, company
since 1977 and has been so consistently underpaid over the years
that I began to think I should accumulate canned goods for him.
Finally in its latest proxy statement, Applied Materials showed
it had begun to pay him more in line with his accomplishments.
Morgan's total pay soared to $10.5 million in fiscal 1999
from $2 million in 1998, according to my calculations. In my
view, he is worth every penny and more.
Take a look at the average annual return for Applied
Materials for staggered periods back to 1983:
APPLIED S&P 500 APPLIED
ANNUAL ANNUAL RATIO TO
PERIOD RETURN RETURN S&P 500
2/28/83 1/31/00 33.5% 17.6% 1.9
2/28/86 1/31/00 43.3% 17.0% 2.5
2/28/89 1/31/00 51.5% 18.4% 2.8
2/28/92 1/31/00 64.0% 19.2% 3.3
2/28/95 1/31/00 65.3% 26.0% 2.5
2/28/97 1/31/00 78.3% 23.2% 3.4
2/28/98 1/31/00 98.0% 17.5% 5.6
2/28/99 2/18/00 222.7% 10.6% 21.1
Applied Materials' compensation committee finally bestirred
itself last year and recognized the quality of this performance.
Morgan's bonus shot up to $1.3 million in fiscal 1999 from
$264,000 in fiscal 1998 and $603,000 in fiscal 1997. His salary
rose 4 percent to $779,000.
But the real action, as always, was in the stock options.
Using the Black-Scholes model to calculate a present value
for the options, Morgan's grant jumped to $8.4 million from about
$1 million in each year from 1994 through 1998.
Still a Good Deal
To gauge whether the big jump catapulted Morgan into the
swollen ranks of overpaid executives, I ran his 1999 package
through my 1998 pay model covering 854 major-company CEOs. (I
don't yet have sufficient data to create a 1999 pay model.) After
taking account of differences in company size and in shareholder
return performance, and after increasing the 1998 pay figures by
20 percent to mimic what might have happened in 1999, I found
that Morgan, even after his big raise, ended up 7 percent below
the market.
For a further proof of Morgan's pay modesty, consider that
even after his options increased by 8.5 times, Morgan still ended
up receiving options equal to only 0.07 percent of the
outstanding shares. And of all the options granted that year,
Morgan garnered only 2.2 percent of the total.
Now take a look at two CEOs in the computer and software
industry who couldn't be more different. First, we have Thomas M.
Siebel of Siebel Systems Inc. During fiscal 1999, he received an
option on 3 million shares, chewing up 3.3 percent of the total
shares outstanding and 25.1 percent of all the shares granted to
employees that year.
Then there is Michael Dell of Dell Computer Corp. He
received options on 12.8 million shares, equal to 0.50 percent of
the shares outstanding. Moreover, those 12.8 million shares
consumed 21.1 percent of all the shares granted to employees that
year. So much for egalitarianism.
Morgan, in sum, is a wonderful buy for his shareholders.
They ought to be more than willing to see him disappear into his
company's treasury for weeks at a time.
As for me, I am thankful there aren't too many Jim Morgan's
out there. Else I would have to give up the role of compensation
watchdog and start up my Social Security pension checks. |
