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The Most Overpaid and Underpaid CEOs

The growing degree of income inequality in America has been in the news lately, particularly the gap between CEO pay and the pay of the average workers. Some argue this is unfair while others say the large pay packages are necessary to obtain top-notch talent. While we aren’t here to answer that question, I did think it would be interesting to take a look at what shareholders get in return for the large pay packages they shell out to top executives.

Typically when a major media company releases a list like this they look at stock market returns. This isn’t the most accurate method as the CEO has little control over the multiple his company is given in the stock market at the beginning or end of the time period studied. I chose to look at free cash flow instead.

I took the approximately 100 domestic companies in GuruFocus’ Undervalued Predictables screener and looked at how much free cash flow the companies generated for shareholders per dollar in executive compensation that was paid. I took the executive compensation numbers from the AFL-CIO Executive Pay Database for 2010 (the latest year available) and cross referenced them with the company’s trailing-12 month free cash flow numbers from Morningstar. For financial companies the trailing 12 months of net income were used instead of free cash flow.

Below is the “Hall of Shame” or the bottom 10. The shareholders of these companies got the least results for the dollars they spent on CEO pay and some shareholders even lost money.

Company CEO Pay (2010) Free Cash Flow (TTM) FCF per $ in CEO Pay
Inter Parfums (IPAR) $487,000 $-77M $-158.11
Community Health Sys (CYH) $20,960,569 $-98M $-4.68
RPC Inc (RES) $2,066,582 $2M $.97
Greif Inc (GEF) $5,698,603 $6M $1.05
Neogen (NEOG) $960,547 $2M $2.08
Darden Restaurants (DRI) $8,480,148 $82M $9.67
Medifast (MED) $1,165,550 $21M $12.68
II-VI Corp. (IIVI) $2,179,926 $28M $12.84
Tractor Supply Co. (TSCO) $7,222,212 $103M $14.26


The best bargains among CEO pay in the Undervalued Predictable screener were as follows.

Company CEO Pay (2010) Free Cash Flow (TTM) FCF per $ in CEO Pay
Microsoft (MSFT) $1,351,121 $25,066M $18,552.00
Copart (CPRT) $49,898 $3,346M $3,346.83
Wal-Mart (WMT) $18,712,721 $11,369M $607.55
Techne (TECH) $258,256 $127M $491.76
McDonalds (MCD) $9,732,618 $4,484M $460.72
United Health Group (UNH) $10,810,131 $4,927M $455.78
Credit Acceptance Corp (CACC) $807,350 $247M $305.94
CGI Group (GIB) $1,686,583 $450M $266.81
Autozone (AZO) $3,809,927 $939M $236.46
Walgreens (WAG) $8,030,843 $1,928M $240.07


Despite their hatred of him, MSFT shareholders are getting a good deal with Steve Ballmer. Of course his low pay probably has a lot to do with the huge number of MSFT stock options and shares he was granted in earlier years.

The highest paid CEO of the bunch was Ralph Lauren of Ralph Lauren (RL) with $29,701,175. Being the founder and CEO of your own public company is a nice gig, if you can get it. Shareholders of RL shouldn’t be too happy as RL barely escaped making the most overvalued list with only $16.67 in FCF generated per dollar of CEO compensation.

Like any industry. some people are widely overpaid and some are underpaid. CEO pay is no different.

Disclosure: Long MSFT
  • CEO Buys, CFO Buys: Stocks that are bought by their CEO/CFOs.
  • Insider Cluster Buys: Stocks that multiple company officers and directors have bought.
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About the author:

Ben Strubel
President and Portfolio Manager of Strubel Investment Management, LLC a value oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, PA.

Visit Ben Strubel's Website


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