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False Reports on CEO Pay Mislead Shareholders, Public

Well, another misleading media report has made it seem like a fat-cat CEO is taking a hard hit to the wallet because of poor performance. But once again, it misses the mark wildly.

This time it’s the reports that JCPenney (NYSE:JCP) CEO Ron Johnson took a big “pay cut” in 2012 after being paid big bucks in 2011 to leave Apple (NASDAQ:AAPL) and join up with the struggling retailer. In theory, he saw a massive 96% cut — to under $2 million in 2012 compensation vs. $53.3 million in 2011.

Just desserts for driving JCP stock price and revenue into the ground, right?

If only.

You see, the massive payday in 2011 was misleading. His base salary was $375,000 and only $236,000 was non-equity incentive. The lion’s share of the “compensation” came from a $52.6 million stock award — which is really only paper compensation until the shares are sold. Market value determines their worth.

So what did he really get paid?

Here’s where the story gets much more interesting.

In January 2012, insider transaction reports showed Johnson sold 777,248 shares of JCP at $41.42 for just under $32.2 million — a very shrewd move, too, since that was up significantly from when JCPenney made him the award. That was less than half of his stake, so at early 2012 valuations, the stock award was actually worth more than $65 million.

Of course, that’s based on that moment in time. The $41.42 execution price is about three times where the stock is trading at now… so the remaining stake of 892,979 shares is only worth $12.8 million or so.

Meaning if Johnson sold the rest of his stock award, which was $52.6 million in 2011, he actually would have made a total of $45 million. And he would have made the lion’s share of that in 2012, not 2011.

You might be saying that this is all academic, that both figures are astronomical. But it’s important because all the headlines that claim a 96% pay cut are not just wrong on their math but wrong on their time frame.

Thanks for the misleading headlines, financial media.

I’m not saying that we shouldn’t track compensation or hold CEOs accountable. But to me it’s much more galling that the CEO bailed out at the very top. Why isn’t that story more widely known?

The answer, of course, is that the compensation of an exec in company stock is a slippery thing and isn’t as clicky. USA TODAY can make a lot of hay talking about a 96% cut, and BusinessWeek can make nice bulleted lists this way. It’s hard to do the same thing with a dynamic value that literally changes day by day.

Take Larry Ellison, the Oracle (NASDAQ:ORCL) CEO who famously makes $1 a year in “salary.” Well, as of last year he owned 1.1 billion (yes billion with a B) shares of Oracle stock. So if his pay goes from $1 to $2, did it double? If it goes to a penny, is it cut by 99%? No freakin’ way.

Similarly, do we say that Larry Ellison “lost $3 billion” today when ORCL stock drops $3 a share? Maybe in jest … but it isn’t true. It’s all paper wealth and intangible.

Financial media should do a better job explaining this.

Or put another way, I want to know about any new stock awards that Ron Johnson gets … but I’d also like to some context about insider stock sales. Because that’s the real story.

After all, if JCP goes to zero in the next few years — which is entirely possible after sales have plummeted 25% and the company is struggling mightily — those remaining stock options Johnson has might literally be worthless in practice despite their theoretical value when they were awarded.

Related Reading

  • Don’t forget how stock-based compensation is taxed, either. The “Buffett Rule” was born because bigwigs pay a very low effective tax rate thanks to the vast majority of their income coming from capital gains like stock sales, not ordinary income like salary. (Wikipedia)
  • The Wall Street Journal’s weekly Insider Spotlight is a great place to get info on the big insider transactions of the week. (WSJ)
  • You can also look at the primary source via the Edgar database. Look for a Form 4 for details on any insider transactions. (

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

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