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Oracle Corporation (ORCL): Is Larry Ellison Being Overpaid?

 September 26, 2013 04:40 PM

The team of Larry Ellison, the founder and Chief Executive of Oracle Corporation (NASDAQ:ORCL), may have won the thirty-fourth America's Cup. However, it could be difficult for Ellison's corporate team to escape the discontent from shareholders, who are against higher pay packages for Oracle executives amid mixed results.

The shareholder angst comes as Oracle has reduced the compensation of all the key executives including Ellison who even turned down a bonus of $1.2 million for the past year as Oracle's growth missed expectations

The key reason for the shareholder displeasure stems from the stock option awards. They argue that Ellison, who beneficially owns a quarter of the company's shares, continues to receive tens of millions of dollars of stock options every year, despite Oracle's mixed financial performance. They could show their discontent at the business software maker's Oct. 31 annual meeting.

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Oracle's first quarter profit rose 8 percent to $2.19 billion, or 53 cents ex-items and trumped analysts' estimates, but adjusted revenue of $8.38 billion fell short of expectations of $8.48 billion.

The CEOs of America benefit from exercised stock options and vested stock awards that normally account for more than 50 percent of executive pay. Those components of compensation are the reason these CEOs are on the list of highest-paid.

For the fiscal year that ended in May, Ellison got a compensation of $79.6 million, which includes a base salary of $1, bonus of $1,126 and stock options worth $76.9 million. The compensation represents a drop of 21 percent from $96.1 million he received last year. Despite the drop, Ellison is still one of the highest-paid CEOs in the U.S.

[Related -Oracle Corporation (NYSE:ORCL) Q2 Earnings Preview: What To Expect?]

Safra Catz, President and Chief Financial Officer, received $44.3 million as compensation, a 17 percent decrease from $51.7 million last year. The package includes basic salary of $950 thousand, option awards worth $42.6 million and bonus of $717.2 thousand.

Even in 2012, Oracle suffered a defeat over executive pay practices in 2012 and managed only a narrow win in 2011 despite Elliot's huge stake. Opponents included BlackRock Inc. and Vanguard Group Inc. Fifty-nine percent of shareholders rejected the company's pay practices at the last annual meeting in November.

The Compensation Committee and the rest of the Board were disappointed with the results of the fiscal 2012 Say-on-Pay vote. The company said the Compensation Committee believes Oracle's executive compensation philosophy and program achieve this goal in a manner that is appropriate for Oracle (and not necessarily other companies) and that significant changes to its executive compensation program were not warranted.

"The Compensation Committee realizes that certain of our stockholders may disagree with this conclusion, but the Compensation Committee believes that our executive compensation philosophy and the current structure of our executive compensation program are in the best interests of Oracle and its stockholders, and that, in the Compensation Committee's opinion, this belief has been validated by Oracle's historical financial and stock price performance over the long term," Oracle said in a recent regulatory filing.

This year investors could step up the pressure. CtW Investment Group, which works with pension funds sponsored by unions affiliated with Change to Win, is said to oppose Oracle's pay practices. CtW, which represents nearly 5.5 million members participate in Taft-Hartley plans with over $200 billion in assets, owns more than 5 million shares in Oracle via its pension funds.

The Wall Street Journal reported that CtW Investment Group, in a letter sent to Bruce Chizen, chairman of the Oracle board's compensation committee, said it would vote against the company's compensation practices and possibly seek to remove directors on the compensation committee if Oracle doesn't put caps on its options awards.

Interestingly, the CtW letter came the same day when Ellison was basking in the glory of his America Cup team's win. Investors and consumers alike were disappointed over the fact Ellison skipped his own keynote address at Tuesday's Oracle's annual conference for customers to cheer for Oracle Team USA.

CtW is a frequent critic of what it sees as excessive CEO pay, and its recent opposition to McKesson's (NYSE:MCK) executive pay practices is a proof of this. This time, CtW could get the support of mutual funds and institutional investors against Oracle.

A major drive by activists over Oracle's executive-pay levels will get considerable support from institutional investors this fall, the Wall Street Journal reported citing an official of one large mainstream money manager.

So, Oracle and Larry Ellison has a tough ask in front of them in getting approval for its pay practices at its annual meeting.



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