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Management Compensation

Sigma Investment Counselors

May 12, 2014

There has been an increase in media coverage of, what many view as excessive, compensation packages for CEOs and senior management, highlighted by the recent media attention given to Coca Cola’s proposed compensation plan, some investor objections and Berkshire Hathaway’s somewhat mystifying responses.  Clearly, this is a matter for investor consideration, but is not always an easy call.  Each situation is unique and sometimes the end result is markedly different from the initial intent.  Consider the following.

In 2006, Ford hired Alan Mulally away from Boeing to become the Ford’s CEO.  Ford paid a lot.  However, under his leadership, the company avoided bankruptcy, unlike the other two Detroit based auto companies, thereby preserving a significant value for Ford shareholders.  Did Ford pay too much?  Some might think so, but that probably does not include the Ford family.

We now know how the Ford/Mulally CEO story worked out.  Another interesting situation, which is currently playing out in real time, is the hunt for at least three CEOs with the ability to effectively manage a big retail business.  The Boards of three major retailers, J. C. Penney, American Eagle Outfitters and Target, are all currently seeking new CEOs.  Who will they be able to attract?  How much will they have to pay?  Will the new hire prove to be worth the money?  Stay tuned.

Sometimes it is difficult to evaluate a CEO’s performance, even with the benefit of hindsight.  A new book, “Beauty Queen”, by Deborrah Himsel, presents the author’s assessment of Andrea Jung’s 13 year tenure as CEO of Avon Products.  The author divides Ms. Jung’s stewardship into two halves, 1999 to 2005 and 2005 to 2012.  During the first period, Ms. Jung and the company did well, but during the second period, not so much.  The shares of Avon, despite a strong showing early, peaked in 2004, and were, at the end of Ms. Jung’s tenure, about the same price as at the start.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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