Government // Enterprise Architecture
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2/2/2011
05:26 PM
Bob Evans
Bob Evans
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Global CIO: Sam Palmisano And Larry Ellison Deserve Their Big Paydays

The anti-capitalism community will howl, but the CEOs of IBM and Oracle deserve every penny of their big comp deals. Sorry, howlers, but the numbers tell the story.

** "IBM earlier this week said revenues for the fourth quarter of 2010 increased 7%, to $29 billion, while net income grew 9%, to $5.3 billion—both quarterly records for the company."

** " 'We completed an outstanding year, with record profit and free cash flow, and exceeded the high end of our 2010 earnings per share roadmap objective,' said Palmisano, in a statement."

** " 'We also capped a decade in which our shift to high-value businesses, our global integration of IBM, our investment in research and development of almost $60 billion and our acquisition of 116 companies have helped us to nearly triple our EPS and return more than $100 billion to shareholders,' said Palmisano, whose total compensation package was worth $21.2 million in 2009, the most recent year for which IBM has published data on executive pay."

** "IBM's push into new markets, along with aggressive cost controls, have powered the company's stock price to new heights over a period when most investors were happy just not to lose money. IBM's share price has almost doubled over the past five years, while an S&P tracking fund would have returned 0% over the same period."

With results like that for IBM shareholders and for IBM customers, did Palmisano deserve an additional $4.25 million in incentive pay? If you ask me, for the scope of Palmisano's achievement affecting 400,000 IBM employees, many tens of thousands of shareholders, and many thousands of IBM customers who proved their belief in him with their wallets, that $4.25 million bump in incentive pay was a great bargain for IBM.

As IBM discloses more details of Palmisano's overall comp package, surely we'll hear cries of outrage from various quarters about the unfairness and even cruelty of one person getting $9 million in incentives and probably another $10 million or so in stock options, while hundreds of thousands of Palmisano's grassroots IBM colleagues only get $1,000 in stock options that don't vest until 2015.

Maybe that will lead to proposed legislation from Congress saying such disparities can't exceed 400x, or 100x, or 10x. But if we're going to head down that suicidal slope, then why not be true to the core ideal and attempt to mandate zero disparity in pay for all employees?

If lots and lots of people could do what Sam Palmisano has done at IBM for almost the past decade,then the fundamental laws of supply and demand would greatly reduce the compensation IBM's willing to pay its CEO. That's clearly not the case, and free-market dynamics result in Palmisano receiving significant compensation for very significant performance.

Then there's Oracle, where CEO Larry Ellison takes a salary of only $1 per year and ties the vast majority of his compensation to the company's stock price. Here's a perspective on Ellison's value to the company from a recent investorplace.com article called 5 Elite CEOs Getting Paid Peanuts:

Ellison "commands only $1 a year to lead the database giant. . . . Oracle shareholders also have some big bucks to spend as well, as the stock sailed 29% higher in 2010." And since the beginning of 2011, the stock's continued to climb.

But since one year offers only a relatively limited timespan for evaluating performance, let's look back over the last decade to gauge Oracle's performance against Ellison's compensation. Without question, for the decade ending May 31, 2009, Ellison was paid spectacularly well, as detailed in a Wall Street Journal analysis of public-company CEO pay over the past decade that put him in the #1 spot with this whopping pay package:

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