Board overlooks AMD's poor CEO performance
The Business Journal (Raleigh/Durham) - June 22, 1998
triangle.bcentral.com
Small Business Insights
From the June 19, 1998 print edition
Executive Compensation
Board overlooks poor CEO performance
Graef Crystal
The giant California Public Employees Retirement System (CalPERS) has been on the back of W.J. "Jerry" Sanders III, the CEO of Silicon Valley-headquartered Advanced Micro Devices (AMD). So far as we know, Sanders has turned a deaf ear to CalPERS' complaints concerning both his pay and his abysmal performance.
So this year, CalPERS sponsored a shareholders' resolution, which would have separated the offices of Chairman and CEO. That way, a non-executive Chairman might convince his fellow board members that something had to be done about Sanders. The resolution did not pass.
Now in fairness to Sanders, his pay during 1997 finally fell significantly.
His bonus declined from $2 million to $618,000. It would have actually declined all the way to zero, had he not had a carry-forward feature in his bonus plan that allowed him to pick up some previously unpaid bonus money from his performance in earlier years. However, his bonus granary is now empty, and unless his performance improves for 1998, he could actually end up receiving nothing in the way of a bonus.
Well, so much for the good news.
For openers, Sanders received $104,178 of "in-kind" compensation for company-provided vehicles. In his salad days, Sanders' company-provided vehicle of choice was a chauffeured Rolls Royce. After enduring voluminous criticism over this selection of company car, he reportedly scaled back to a top-of-the-line Mercedes. In any event, $104,178 for company-provided vehicles has to be a record of sorts.
The current proxy also reveals that Sanders received a further $78,176 for the provision of "physical security services." When you read about his performance you may conclude that this is to protect him from his own shareholders.
He is a founder of AMD and has headed the company since 1969. We don't have stock price history between 1972, when it went public, and 1990, but since July 31, 1980, Sanders' performance demonstrates that he has a lot to learn.
In a company like AMD, it's possible to look good because the company's stock is extremely volatile. For proof, consider that Sanders chose to include in his company's proxy statement not only the obligatory five-year total return table but also a second table, this one portraying AMD's performance over the seven-year period ending Dec. 31, 1997.
The seven-year comparison showed AMD to have out-performed, if only slightly, the S&P 500 Index. A check of all other time windows beginning on a Dec. 31st (commencing with Dec. 31, 1980) and ending Dec. 31, 1997, showed that the seven-year time window Sanders chose to reveal to his shareholders was the only time window that AMD ever outperformed the S&P 500 Index!
To get around this timeframe issue, we looked at all daily stock prices between Nov. 12, 1982, and May 8, 1998. Why these two dates? The second one was the date we performed our analyses. As for the first date, we were able to obtain pricing history on Intel, which is AMD's chief competitor, only back to Nov. 12, 1982.
First, we charted daily stock prices for the S&P 500 Index and then drew a trendline through all the dots. We discovered that, on the average, the S&P 500 Index had exhibited 11.9 percent per year growth during between Nov. 12, 1982 and May 8, 1998. However, in total shareholder return, the S&P 500 Index did better, inasmuch as the dividend yield is usually around the 2 percent to 3 percent level.
Next, we performed the same analyses using Intel's daily stock prices. Here, found a higher growth rate. It wasn't the 11.9 percent per year of the S&P 500 but a growth of 26.1 percent per year.
Then there is AMD. When we plotted its daily stock prices between Nov. 12, 1982, and May 8, 1998, we found that the growth rate was an almost immeasurable 0.5 percent per year.
Recently, we spoke to some 250 CEOs at the Forbes CEO Conference in Phoenix. Various speakers, including CEOs, praised stock options as the ultimate pay-for-performance vehicle.
But if that were really so, wouldn't it follow that Sanders, with his anemic 0.5 percent per year stock price growth record, would have received hardly anything from his stock option grants.
Prior to 1997, Sanders exercised stock options with gains of at least $41.3 million. And in 1997, he exercised more options for a further gain of $15.3 million. And at the end of 1997, he was holding still more options with unexercised profits of an extra $9.3 million. $57.1 million of actual option gains and $9.3 million of anticipated option gains for stock price growth of 0.5 percent per year?
Of course, a good part of his option gains derived from the fact that his options were repriced six different times in the years prior to 1991 and also from the fact that his most recent option (2.5 million shares in 1996) carried a most advantageous strike price.
Not only has the AMD board tolerated his exceedingly poor performance, but they have gone on to reward him handsomely.
Off hand, we can think of no other CEO in America who has been at the helm as long as Sanders and who has performed as badly as he has.
However, we do not believe that Sanders poor performance is due to any stupidity on his part. To the contrary, he is an exceedingly bright person.
If that were not so, he would still be holding on to all of his founders' shares and his exercised option shares. Instead, he has been a net seller of his company's shares for sometime. As of Feb. 25, 1998, he was holding only 213,247 shares worth a mere $4.6 million.
Maybe your ordinary shareholder still has a measure of confidence in Jerry Sanders. But Jerry Sanders himself? Not on your life! The way we see it, he knows deep in his gut that holding stock in his company is a bad deal.
Crystal is a San Diego-based executive compensation consultant and editor of the Crystal Report at crystalreport.com.
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