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Thursday, April 1, 2010

Parsing Occidental CEO Ray Irani's "Excellent Performance"

Obscene Exec Pay: Exhibit A

In a year when pay for chief executives overall fell, Ray R. Irani came out on top.

The longtime head of Occidental Petroleum was awarded total compensation of $52.2 million, up from $49.9 million in 2008.

The oil company's directors believe in "excellent pay for excellent performance," and Mr. Irani's leadership resulted "in exceptional returns for stockholders," said a spokesman.

--"Occidental Chief Tops Pay List"; The Wall Street Journal (4/1/2010)

Gee, if only I'd bought stock in a company like Occidental, I thought to myself, my portfolio would have done so much better last year (instead of melting down, like almost everyone else's).

Then I realized: I did buy stock in Occidental.

In 1989.

"Ray and Me"

That coincides almost perfectly with Mr. Irani's tenure at the helm of Occidental, where he has been CEO since 1990.

So, how has my investment done in the 21 years I've been an Occidental shareholder?

Not nearly as well as Mr. Irani.

From a purchase price of $15 per share then, my Occidental stock has appreciated to almost $87 today.

That's an almost six-fold increase -- not too shabby, huh?

Parsing the Returns

While it may not be shabby, it certainly doesn't qualify as stellar, either.

That's for the following three reasons:

One. Inflation. A dollar in 1989 isn't worth a dollar anymore; it's worth just a little over half that. That's because the CPI has just about doubled during that interval.

So $15 in 1989 buys the same as $30 today, reducing my 6x return to a little less than 3x.

Still not bad, though.

Except that you have to factor in how much time it took for that to happen.

Two. Annual Rate of Return. Tripling your money over two-plus decades certainly sounds good.

In fact, however, that corresponds to a rather mediocre annual return of just over 5%.

For much of that period, plain vanilla CD's yielded 5%-plus.

Three. Taxes.

If I sold my Occidental stock today, I would pay capital gains taxes -- a tame 15% by historical standards, but still not nothing.

Because capital gains taxes aren't indexed for inflation, the taxable gain would be $87 minus $15, or $72; 15% of that comes to $11. So, that leaves me with $76 for my two-plus decades as an Occidental shareholder.

How much of that is attributable to Mr. Irani's "excellent performance?"

And how much did Occidental's board of directors -- ostensibly representing shareholders like me -- think Irani should be compensated for that?

Mr. Irani's "Excellent Performance"

The answers: "less than you might think," and, "a sh*tload."

What casual readers of The Wall Street Journal don't know, but long-time Occidental shareholders (like me) do, is that Irani's 2009 jackpot was hardly an aberration.

According to Forbes magazine, here's what Mr. Irani has been paid the last several years:

2009: $52.2 million
2008: $49.9 million
2007: $54.4 million
2006: $415 million
2005: $81 million
2004: $64.1 million

Surely, Moses was paid less for shepherding the Jewish people out of Egypt.

So is that what Mr. Irani did?


Go back to the $15-to-$87 appreciation in the stock during his tenure.

Just using "nominal" dollars (the normal kind), that corresponds to a compound annual return of just under 9%.

Not 20% a year. Not 50% a year. Nine measly percent!! (Not even).

Making that number look even worse is what the average S&P 500 stock did during Irani's two decade tenure: it appreciated almost 7% a year.

So, is Mr. Irani a consummate corporate talent?

You bet he is: at getting a pliant board of handpicked directors to pay him a ransom that would make a king blush.

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