Dimon: Voting Against My Pay Package Means You’re A Lazy & Stupid Investor

May 30, 2015 2 Comments

I don’t really talk about what I own or what stocks that I like, but aside from Rite Aid, I do like me some JP Morgan Chase & Co (NASDAQ: JPM). It’s consistently outperformed its peers regarding and it shows that it doesn’t need to rely on higher rates to secure revenue. Despite all of the regulations and legal battles, it has proven to be one of the better financial stocks post-credit crunch.

However, early this month the shareholders of JP Morgan voted on pay package of current CEO Jamie Dimon. I didn’t really cast a vote, instead I decided to go with a proxy vote. All I can say is that I hope their vote was the right one, because this statement would probably apply to me:

From USAToday:

James Dimon: “God knows how any of you can place your vote based on ISS or Glass Lewis. If you do that, you are just irresponsible, I’m sorry. And you probably aren’t a very good investor, either. And you do. Believe me, I know some of you here do it. Because you’re lazy”

Glass Lewis and the Institutional Shareholder Services, better known as ISS, are basically proxy advisory firms. What these firms do is review documents businesses send to their shareholders regarding executive compensation. These are categorized as DEF-14A documents, or better known as ‘Proxy Statements.’ These proxy advisory firms analysis how shareholders should vote at annual shareholder’s meeting, and they also vote on other issues, regarding board membership and other shareholder issues.

How does this relates to Dimon’s comments? The ultimate goal is to maximize shareholder value, and the Board of Directors (BOD) have a huge interest in making sure that value is preserved. The CEO of the corporation engages in operations that helps serves that purpose.

Shareholders are entitled to the profits of the company. This means, contrary to the conventional understanding of finance, they can only be paid when the company’s obligations — creditors, interests on debt, employees, operating expenses — are paid for as well. There are times when company profits are invested back in, but one of the main reasons why people invest into companies is to receive a claim on company earnings.

The most common example of how investors can benefit from company earnings are share buybacks. There are plenty of Corporations on a ‘buyback binge’ as of late, usually encouraged by activist investors. The most prominent being Carl Icahn and David Einhorn for Apple Inc. The two other benefits of earnings would be dividends and increased stock values.

Shareholders, activist investors and other looking to make money from the company’s profits have a large incentive to pay attention to proxy statements (Executive Compensation Packages).

Dimon’s 2014 Compensation

There is an enormous lack of understanding regarding how CEO compensation is determined, how it works and what it consist of. Most people believe its all salary, while people seem to believe executives pay themselves . It doesn’t quite work that way. CEO compensation is often a mixture of salary, annual incentives, long-term incentives, benefits, perquisites and severance agreements.

The most common of these are equity compensation, which comes in the form of company stock. Anyone can go online at the SEC EDGAR database and search for the proxy statement (DEF 14a) for any publicly listed corporation. Some companies provide these forms on the shareholder’s section of their website, such as JP Morgan.

Here is the total compensation packages for James Dimon in 2014:

Dimon’s compensation package consisted of a $1.5 million dollar salary, $11.1 million dollar in restricted stock units (RSUs) and $7.4 million dollars in cash incentives. Altogether $20 million dollars in compensation, NOT to be confused with $20 million dollar salary. About 60% of Dimon’s compensation is in RSUs, which means he does not get these shares immediately.

The BOD believe Dimon is a valuable CEO and hopes he remains CEO as part of the long-term success of JP Morgan. They offer him $11.1 million in RSUs. The company is currently trading around $66 dollars a share. These RSU are placed in a 5 year vesting period, according to the Proxy statement (page 44), 50% after two years and the other 50% after the remaining three years. Depending upon how JP Morgan is trading after 5 years, Dimon could actually receive more or less than $11.1 million dollars.

Considering majority of Dimon’s compensation consist of RSU, he has a good incentive for the stock to perform well by increasing shareholder equity. Dimon has an even greater incentive to increase shareholder equity if is compensation consistent of only salary and RSUs. However, considering that he also received cash rewards as a part of his package, it means he is less beholdened to the will of shareholders, activist or otherwise.

Stock Performance & Executive Compensation

In the grand scheme of things, it all relates to James Dimon, his comments, and his comments regarding the 40% of shareholders who voted against his pay packages.

James Dimon has been CEO of JP Morgan since 2004. You can’t see it in this chart, but the stock as taken a major hit in the aftermath of the financial crisis, as all the financials did, trading as low as $14.96. The stock has increased 342% in 6 years (averaging 57% a year), which is pretty impressive considering the stock hasn’t split since June 12th, 2000.

Stock performance is the most common way of measuring shareholder value, and it is pretty easy to tell what has gone on considering the stock has done nothing but gone up.

We can also look at other variables in Dimon’s compensation:

It’s clear that Dimon’s pay is related heavily on the bank’s performance, and his pay was determined on the following factors:

  • Achieved record net income of $21.8 billion, on net revenue of $94.2 billion.
  • Increased tangible book value for the 10th consecutive year, with a year-over-year increase of 10%, from $40.81 to $44.69.
  • Continued to make new innovations regarding security and control, involving spending $2 billion more on regulatory issues in 2014.
  • Strong Return on Average Tangible Common Shareholder Equity (or ROTCE) of 13% versus through-the-cycle target of 15–16% and delivered record EPS of $5.29, while increasing Basel III Advanced Fully Phased-In common equity Tier 1 capital ratio to 10.2% from 9.5% (Note: ROTCE is computed by dividing annualized net earnings applicable to common shareholders by average monthly tangible common shareholders’ equity.).
  • Delivered sustainable shareholder value.

And now Dimon’s pay performance relative to his industry peers:

Simon’s pay is relative moderate compared to others, especially when you consider the following:

  • Dimon has generated more profit per dollar of compensation paid than any other CEO in JP Morgan’s Financial Services Peer Group. This is measured by total compensation as a percentage of net income.
  • ROTCE has average at least 3%, higher than the median of JPM peers.

These comparisons are pretty important, especially when you consider how other CEOs in the industry are paid. Goldman Sach’s CEO Lloyd Blankfien received a total of $24 million in compensation. This includes a $2 million dollar salary, $7.33 million dollar cash bonus, $7.33 million in RSUs and $7.33 in a “performance-based” bonus.

Citi’s CEO Michael Corbat received a total of $13.7 million in compensation. This includes a $1.5 million dollar salary, $4.6 million cash bonus, $3.45 million in RSUs and $3.45 performance share units.

When comparing the JPM own performance, especially to their individual peers, it’s pretty clear that Dimon is more than deserving than his compensation package. While shareholders have the right to vote the way they want on these issues, the 40% of investors who voted against it would be wrong, and Dimon would be right.

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