CPU 1478

Even the most rabid AMD fan would admit that 2007 was a terrible year for the company. The company lost a few billion dollars, saw the stock price plummet by more than 50% for the second straight, and all its new products shot blanks.

How much would you pay somebody for running the place in such a year?

The answer is: $7.4 million.

(Executive compensation has gotten so complicated that different people can legitimately come up with different estimates. AMD’s estimate of Mr. Ruiz’s compensation is slightly less than $8.1 million for 2007.)

Per AMD, Derrick Meyer’s total compensation was about $3.3 million.

Both amounts are somewhat less than they were in 2006. AMD’s estimates for Hector and Derrick’s pay in 2006 was $10.25 and $3.5 million, respectively.

The only reason why these figures went down was because the compensation committee didn’t have the nerve to pay anybody a performance bonus in 2007. Both parties actually got paid more in non-bonus compensation for 2007 than in 2006.

Pay Me More When I Succeed, Pay Me More When I Fail

Last year, a columnist at Bloomberg wrote the following.

“Now for the other side of pay-for-performance, where pay is supposed to drop when performance goes south. . . .

“. . .Hector Ruiz . . . received a 10 percent increase in base salary, although his bonus dropped to $2.6 million from $4 million in 2005.

“In all, his 2006 pay package of $10.6 million was 2 percent higher than his 2005 pay package of $10.4 million.

“For his shareholders, however, total return for the year ended Dec. 31, 2006, was negative 34 percent. After subtracting the positive 16 percent return on the S&P 500 Index, AMD’s shareholders received a negative excess return of almost 50 percent.

“I guess Ruiz’s idea of shared sacrifice was to accept essentially no pay raise in 2006. The possibility of Ruiz cutting his pay to keep faith with his shareholders seems to have escaped him.

“Ruiz made a structural change in his 2006 pay package. In 2005, he received free share grants worth $1.1 million and options worth $3.4 million. With that bad news in 2006, Ruiz began to hedge his bets. His free share grants effectively tripled to $3.4 million, while his option grants dropped to $1.9 million in present value.

“So not only didn’t Ruiz cut his pay to match his company’s horrible performance, he restructured his pay package to make it less risky in the future. And this passes for pay-for-performance.”

In other words, getting an option to get shares for free is a lot better than getting an option to buy AMD shares at, say, $16 (which were the terms for many of AMD exec options a few years back). If the share price is $6.38 (AMD’s closing price yesterday), a free option is worth $6, while an option to buy at $16 is worth nothing.

If AMD’s stock price went to $30, a free option would be worth $30, while a $16 option would be worth only around $14.

In short, Hector (and to a lesser degree, the other execs) have been effectively increasing their base pay quite a bit in disguise while AMD has been sinking. Should they get the company flying right, their free options will be a lot more, plus there’s always bonuses!

Back in 2003, the last time AMD was doing badly, Hector’s base pay was roughly two million dollars. Now, when AMD is doing even worse, his base pay is about six million.

And, if you had thoughts about firing the guy, that would cost AMD $9 million in severance pay.

Talk about a rigged game.

Yes, there are those who make the AMD execs look like Mother Teresa. But not too many, and very rarely when their company performs this badly.


Be the first to comment

Leave a Reply