With all of the recent attention that the so-called "one percent" are receiving in the mainstream media, I thought that I would take a more in depth look at the most "one percent" of them all, at least according to Forbes and their 2011 list of America's highest paid CEOs. When looking through the list, it truly is amazing how well paid some of our corporate leaders are, including the gentleman at the top of Forbes list, one John Hammergren, CEO of McKesson Pharmaceuticals.
You might be asking yourself John Who of What? I asked myself the very same question. Here I was expecting a Bill Gates type or the CEO of a major, multi-national oil company but I was dead wrong. McKesson, a health care company headquartered in San Francisco, employs more than 32,000 people across America and around the globe. They are America's oldest and largest health care services company with their corporate roots going back more than 175 years and they currently ring in at number 15 on the Fortune 500 list. They are the largest pharmaceutical distributor in North America and, on a daily basis, they distribute one-third of the medicines used in the United States. As America's leading health care IT company, they are responsible for the development and installation of electronic health care systems that eliminate the need for paper records and provide software that helps physicians in diagnosis and treatment of patients. The company's system is installed in more than 70 percent of the nation's hospitals with more than 200 beds.
Let's start by taking a look at how well their stock has done over the past 5 years:
McKesson's stock performance has not been too shabby; 5 years ago they were trading at about $50 per share. The stock is currently trading in a range between $70 and $75 and hit a 52 week high of $87.32 and a 52 week low of $60.39. It is trading at a P/E multiple of 15.8 and paying a dividend of 80 cents per share (about a 1 percent yield). It took a hit back in the fall of 2008 and spring of 2009, dropping to just over $30 per share but, then again, whose stock didn't take a massive haircut during that period?
Over the past five years, the company's annual revenues increased from $93 billion to $112 billion (compound annual growth rate of 4.8 percent) and earnings per share increased from $2.89 to $4.86 (compound annual growth rate of 13.9 percent). Over the same time period, quarterly dividends have increased from 6 cents per share to 20 cents per share. The company is currently sitting on $3.6 billion in cash and cash equivalents.
John Hammergren, age 52, has been at the helm of McKesson since 2001 where he currently holds the positions of Chairman, President and Chief Executive Officer. He gained extensive experience in the health care field after graduating with a BA in Business Administration from the University of Minnesota and and MBA from Xavier University.
Back to the subject of this post. As source material for Mr. Hammergren's compensation package, I'm using McKesson's Proxy Statement for July 2011 Annual Meeting. Let's start by looking at Mr. Hammergren's share ownership:
The 1.6 million shares include those that may be acquired by exercising of stock options or vesting of RSUs within 60 days of May 31, 2011 (1,006,000 shares) and those controlled by family members living in the same household, family trusts or an independent trust (590,257 shares). At the recent trading price of $73 per share, Mr. Hammergren's shares are worth a cool $116,820,440. According to McKesson's Stock Ownership Policy, Mr. Hammergren must own a minimum of 10 times his base salary ($16,800,000) worth of stock as a gesture toward shareholders showing that he's "in it like the rest of us". Not to worry folks, his actual stock ownership multiple is in the 77 times range.
Now, let's look at Mr. Hammergren's overall compensation package for the last three years:
Note his rather small salary of $1,664,615? While that seems like what most of us would make in the better part of a lifetime, it is a rather insignificant part of his overall compensation package coming in at around 3.6 percent of the total. Why, you ask? Because forms of income other than salary receive preferential tax treatment. Interestingly enough, according to the McKesson Proxy Report "... Section 162(m) of the Internal Revenue Code generally provides that publicly held corporations may not deduct in any taxable year specified compensation in excess of $1,000,000 paid to the CEO and the next three most highly compensated executive officers, excluding the chief financial officer. However, performance-based compensation in excess of $1,000,000 is deductible if specified criteria are met, including stockholder approval of the materials terms of applicable plans.". It certainly looks like stockholders approved!
It's always interesting to look at the exact items that are included in the "All Other Compensation" column. In Mr. Hammergren's case, in fiscal 2011, the company paid $16,935 for financial counseling services including tax preparation, $231,743 for installation of home security, personal use of corporate aircraft and the incremental cost of personal use of a company car and driver. Mr. Hammergren must be quite concerned about his personal security; he was reimbursed for spending $122,177 for the installation and monitoring of home security devices (noting that this amount is not that much below what an average American home costs!). As well, he accrued $100,560 worth of personal use of the company aircraft and $9,006 worth of company car and driver. Let's not forget his expenditure of $7,562 to attend the annual Board retreat and two annual employee award programs with his spouse.
For fiscal 2011, depending on corporate performance, Mr. Hammergren stands to make between $1,260,000 and $6,000,000 on his Management Incentive Plan (MIP) should the company exceed a predetermined earnings per share threshold. In addition, should the company's profitability exceed a predetermined threshold over the next three years, he stands to make up to an additional $8,100,000 on his Long Term Incentive Plan (LTIP). In addition, he received 402,000 options with an exercise price of $67.81 and up to 285,700 Performance Restricted Stock Units worth a total of $19.5 million should everything work out as shown here:
So far, Mr. Hammergren's compensation package is certainly not out of the norm for those that have reached the lofty levels of the 0.1 percenters. But (and it's a big but), we haven't yet looked at the options that he exercised in the fiscal year ending March 31, 2011. Here is a screen capture showing the gross take from exercising both his stock options and his stock awards:
Yup, that's right. He made $112,121,910 by exercising 3,353,666 options and another, rather paltry sum of $6,552,247 for vesting another 94,050 stock awards or RSUs (Restricted Stock Units). That's a total of $118,647,157 just on his stock holdings alone! And, despite that, this is how many unvested stock options he still has remaining just in case you were concerned that he was out of vested options:
The remainder of Mr. Hammergren's unvested options are worth an additional $62 million and change! See, I told you that there was no reason for concern.
We know that the future of Social Security payments is not exactly looking secure in this time of $14.8 trillion debts and $1.2 trillion deficits with no end in sight. I want to assure you that you should not lose one minute's sleep worrying about Mr. Hammergren's pension. Here's the pension that 15 years of service have built up:
For your illumination, that's nearly 6 times the pension benefit amount that his nearest fellow named executive officer, Paul Julian, Executive Vice President and Group President, has accrued over 14 years of service. In 2011 alone, the actuarial value of Mr. Hammergren's pension increased by $13,458,402! McKesson's executive pensions can be collected at age 62 or when years of service total 15 and their age reaches 55. Only three years to go, Mr. Hammergren, and then it's all day golfing, skiing and sailing!
Suffice it to say that Mr. Hammergren's total compensation for 2011 certainly is eye-opening. His total compensation for fiscal 2011 is in the $150 million range. Using that number and the United States Census Bureau's median household income number for 2009 of $50,221, Mr. Hammergren makes as much as 2980 "average" American families. While I'm certain that Mr. Hammergren runs McKesson very professionally and has led it through years of growth, one has to question whether his services really have the monetary value of the services that are rendered by nearly three thousand American families. I'll leave that up to you, however, from my perspective, it is no wonder that there is anger in the streets of America.