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Time Capsule: CEO Compensation 101: Why Neal Patterson’s Pay is Shocking

April 27, 2012 Time Capsule No Comments

I wrote weekly editorials for a boutique industry newsletter for several years, anxious for both audience and income. I learned a lot about coming up with ideas for the weekly grind, trying to be simultaneously opinionated and entertaining in a few hundred words, and not sleeping much because I was working all the time. They’re fun to read as a look back at what was important then (and often still important now).

I wrote this piece in April 2007.

CEO Compensation 101: Why Neal Patterson’s Pay is Shocking
By Mr. HIStalk

mrhmedium

We learned last week that Cerner paid Neal Patterson $4.2 million in 2006, most of it in stock. That’s a shocking amount, one that deserves the immediate scrutiny of the company’s board, its shareholders, and its customers.

Why so little?

Corporations often wildly overpay CEOs. What does overpay mean? When the shareholders are losing their shirts and the fat cat running the show still gets a big payday.

Example: Ford continues its near-death experience at the hands of Asian manufacturers with better and cheaper products, losing a mind-boggling $12.7 billion last year, but they managed to scrape up $28 million for their new CEO. That’s for just four months on the job. He’d better have brought a magic wand that can make Toyota disappear to be worth that.

Or Home Depot. While the stock was dropping 10% over the past six years, their CEO took home $124 million, plus many dozen millions more in stock options. Are those orange aprons so hideous that no one with more wealth-building talent will wear one?

At least Exxon, whose retiring chairman got a $400 million parting gift as he tried to keep a straight face about oil supply and demand, made $36 billion in profit last year. Providing $3 a gallon gas for those Fords is much more lucrative than building the cars it goes in. I hate buying expensive gas, but as long as Exxon can keep me and everybody else doing it, they’re justifiably earning big bucks.

A year ago, CERN stock was at $39.65. It’s now at $55.09. That’s an eye-popping 39% increase. The Dow was up about 14% during that time.

Pay for performance works when it comes to running companies. You want the person in charge to have big-time skin in the game. Their job is to make shareholders money. If they do that, pay them well. If not, find someone who can.

It’s like being a coach. You can be an inspirational leader, a civic beacon, and a role model, but for the money you’re being paid and the number of qualified people who could take your job tomorrow, you’d better win. Americans like winners.

Everybody has their own opinion of Cerner and its products, but it doesn’t matter what you or I think. CEOs of publicly traded companies have one audience to please – investors. Rightly or wrongly, CEOs live and die by the quarterly numbers. The most important product Cerner sells isn’t Millennium, it’s shares of stock. That’s where the real money is made.

Cerner is selling $1.4 billion a year and has a market cap of $4.35 billion. That’s pretty good for a company with cutthroat competitors and customers who (theoretically) don’t have a lot to spend.

Patterson runs the company his way, just like he did from the beginning when they were a no-name little lab vendor. That was 28 years ago. Not many current CEOs started the company, built it up, went public, and stayed at the helm.

The best possible alignment between CEOs and shareholders is to compensate them in stock. Not by giving them a bunch of free shares for taking the CEO job, but to pay them in stock instead of cash. They make money when everyone else does, the ultimate "eating your own dog food."

That’s why you shouldn’t feel too sorry for Neal. He’s sitting on $317 million worth of stock. I don’t own CERN shares, but for those happy shareholders who do, I say: bravo to him.

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