COMPARED with the pay of celebrity chief executives such as Oracle Corp.'s Larry Ellison, the $7.3 million in total compensation pulled down last year by Synnex Corp. CEO Robert Huang is practically paltry.
But set against the tech-product distributor's fiscal 2006 profit of $51.8 million, Huang's pay looks a lot bigger. In fact, his compensation amounted to 14% of the company's earnings, the highest pay relative to earnings at California's 100 largest public companies.
Anger among investors has intensified in recent years as executive pay has escalated. One reason for the growing fury, according to corporate governance advocates: Compensation increasingly is taking a noticeable slice out of corporate profits.
Last year, among the state's top 100 companies, the typical CEO's pay amounted to 2% of net income, The Times found in its annual report on executive compensation in California.
Put another way, the share price of that typical company would theoretically be 2% higher if it didn't have the CEO's pay eating up earnings, based on the notion that a firm's stock price amounts to a multiple of its earnings. And how many investors would ignore a 2% change in the value of their stock portfolios?
At 14 companies, including Synnex, the chief's pay amounted to 5% or more of net income.
Critics say no one deserves such a big piece of the pie.
"It does raise the question about whether shareholders are getting adequate bang for their buck," said Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises shareholders and campaigns for good corporate governance. "These numbers are often material, at least to near-term earnings."
This year, for the first time, our compensation listings include a column showing the CEO's pay as a percentage of earnings, plus a column showing the theoretical hit to the company's stock price (calculated by multiplying the percentage of profit by the stock price on May 31). For example, at Synnex, Huang's pay theoretically reduces the value of each share by $2.90. (The stock finished last month at $20.48 a share.)
To be sure, these yardsticks have flaws.
For one thing, at 15 companies, the two figures couldn't be calculated because the company lost money or earned less than the person in charge.
In addition, these calculations ignore extraordinary items. So if a company takes a big charge against earnings, such as a write-off for restructuring costs, the CEO will appear to be comparatively higher paid than he or she would have otherwise.
Also, a certain share of CEO pay is tax-deductible, which means for many companies, their profits and stock prices are hurt somewhat less than the calculations suggest. (A substantial share of CEO compensation, however, may not be deductible because of tax laws written to reduce incentives to give executives big pay packages.)
And a CEO who is so successful that his company sells at an extraordinarily high multiple of earnings also will appear relatively expensive on a per-share basis, even though his shareholders are likely to feel that the CEO is worth every penny.
But as benchmarks measuring CEO pay go, McGurn said, this is as reasonable as any.
"We get companies regularly reducing CEO compensation to a ratio of the market capitalization of the company, and saying this is their commission on growth," McGurn said. "Turnabout is fair play. If you claim that you are entitled to a percentage of the growth, shareholders can certainly fairly ask, 'How much is your pay costing me?' "
The answer, at many of California's biggest companies, is a lot.
By far, the most expensive California CEO relative to net income was Huang at Synnex. Company spokeswoman Laura Crowley declined to comment on whether it was appropriate to give an executive 14% of earnings, but she said the company's board felt his pay was justified.
"We do have an executive compensation committee, built of independent directors, who have a wealth of experience formulating the compensation packages that they deem appropriate," she said. "Bob Huang is the president, CEO and founder of a company that has been around for 27 years. We have done well as far a being a consistently profitable organization."
Gateway Inc.'s Ed Coleman ranked second, pocketing the equivalent of 9.6% of the Irvine-based computer maker's profit. Coleman was hired in September to turn the struggling company around.
In absolute terms, he earns a relative pittance, taking home just $927,122 in cash and stock. Unfortunately, Gateway's shareholders can say the same. The company earned $9.6 million last year on nearly $4 billion in sales. Before Coleman's arrival, Gateway had a profit of $6.1 million in 2005 after losses of $568 million in 2004 and $515 million in 2003.
Gateway declined to comment about Coleman's pay, except to emphasize that he was new to the job.
Ranked No. 3 in percentage of pay was Chad Dreier at Ryland Group Inc. His total pay of $31.4 million amounted to 8.7% of net income.