Gregg Engles is a very lucky man. The CEO
of Dean Foods (NYSE: DF)
is surrounded by a very friendly group of board members who want him to make lots of money, no matter how he performs. And frankly, his performance has been dismal. Engles has pursued a "roll-up" strategy, acquiring many dairy-related businesses in hopes of generating higher sales and profits.
The plan hasn't worked: Per-share profits peaked at $2 in 2006 and fell below $0.50 in 2010. The company's staggering $4 billion debt load (thanks to all of its deals) has scared off many investors. Still, Engles has been making an average $20 million annual salary while watching over this destruction of shareholder wealth.
(I recently noted that Dean Foods may finally see some upside, but it's likely to be a long time until the stock moves back up above $20.)
Head they win, tails you lose
A few decades back, a new trend emerged in the field of executive compensation. High-profile CEOs were willing to take smaller salaries in exchange for much larger stock-option grants. It was surely annoying to see some CEOs like Disney's (NYSE: DIS) Michael Eisner take home more than $200 million in 1993 and more than $500 million in 2007, but at least that payday was due to a surging stock price.
These days, executives have it even better -- they still get rich even if the stock price doesn't take off. In many instances, a falling stock price allows them to reprice their options at a much lower price. Michael Eisner's successor at Disney, Robert Iger, is probably unperturbed that his stock has gone nowhere in the past five years. He's still taken home $147 million in the past five years, according to an analysis conducted by Forbes magazine.
It's time for investors to stop rewarding this behavior. Before buying any stock, you need to check out how executives are compensated and you need to see whether they are able to deliver market-beating returns to shareholders.