James D. Robinson III ran American Express Co. for many years, and many observers concluded that he ran it into the ground. Toward the end of his long reign, he became noted for carrying two lethal genes: one for poor long-term performance and the other for excessive executive pay. It was those genes that eventually killed him as a chief executive officer.
I was one of Mr. Robinson's critics, and, given my field, I naturally concentrated on his bloated pay package. During the three years, 1988 through 1990, Mr. Robinson pulled down, by my estimation, $4.5 million per year. But the criticism from me and others motivated him to temper his greed, and for the final two years of his tenure, 1991 and 1992, his compensation averaged a scant $2.7 million per year.
Mr. Robinson was replaced in February 1993 by Harvey Golub, who, earlier, had headed an Amex subsidiary, IDS Financial Corp., and who had been based in Minneapolis. Mr. Golub was given a mandate by his board to turn around the ailing giant. Based on early returns, he seems to have succeeded. From the end of February 1993 through the end of December 1993, an investor who had put $100 in Amex stock and had reinvested dividends in more Amex shares would have seen the value of his investment climb to $129.10, a level of performance that exceeded by only 17% of the companies comprising the Standard & Poor's 500 stock index.
So there is nothing to criticize and a lot to praise concerning Mr. Golub's early performance as CEO. But there is plenty to criticize and nothing to praise about his pay. In fact, I cannot help but long for the good old days when Jimmy Robinson was earning only about $2.5 million per year. To be sure, he hardly ever made it to first base, but he was handsome, had a great body because of his constant iron-pumping and was ever suave. And based on the pay of his successor, he was cheap.
Now let's take a look at Mr. Golub. For 1993, he earned a base salary of $777,000, and carted away a bonus of $1.85 million. So counting just those two elements of his total pay package, he already earned almost as much as Mr. Robinson during the latter's final days. But the counting has just begun. To the $2.6 million of cash compensation just mentioned, we can add an award of free shares of Amex stock worth $3.4 million at the time they were awarded. All Mr. Golub has to do to earn these shares is remain with Amex over a four-year period. He is not required to perform. Should the stock price drop 50%, he will still walk away with shares worth $1.7 million.
Adding to his free shares, we now have a pay package worth $6 million, which is better than Mr. Robinson earned in his best year. But we're a long way from being finished. We next have to add an award of $908,000 paid to Mr. Golub under a long-term performance plan. That brings us to a total pay package of $6.9 million.
But we're still not finished. Mr. Golub also received two stock option grants during the year, one covering 150,000 shares and the other covering 250,000 shares. I figured those two option grants had a present value at the time of their grant of $4.4 million. Adding this value to the $6.9 million already recorded brings Mr. Golub's total pay package to $11.3 million. To that, we can add a piddling amount of miscellaneous compensation worth $335,000.
Altogether, we now have a total pay package of $11.6 million, or almost triple what Mr. Robinson earned in his best year.
But, sad to say, we're still not finished. Oh, we're finished with the pay figures disclosed in the executive compensation section of Amex's proxy statement. But the company artfully buried another $6 million of compensation in a different portion of the proxy statement.
Recall that Mr. Golub was relocated by his company from Minneapolis to New York. Now almost all blue-chip companies will reimburse an executive for almost all reasonable costs associated with his relocation - costs like travel, shipment of household goods and subsistence in the new city while looking for a place to live. And almost all blue-chip companies will also help the executive in the sale of his former residence. Typically, the company has the executive obtain three independent appraisals of the residence's market value. Then the company insures that the executive receives the average of those three appraisals; on top of that, the company reimburses the executive for brokerage commissions and closing costs.
By working off the average of three independent appraisals, the company guarantees that the executive gets a fair shake. If he bought the house five years earlier and paid $500,000 for it, and if the appraisals come in at $750,000, he earns, rightfully, a $250,000 profit. On the other hand, if he bought the house five years earlier and paid $500,000 for it, and if the appraisals come in at $350,000, he loses, rightfully, $150,000.
So how can American Express be criticized for following this common procedure? Well, it didn't follow that procedure.
It seems that in July 1991, Mr. Golub was still building his house in Minneapolis when the company relocated him to New York City. By all accounts, the house was not exactly the type of dwelling that your normal, conservative Minneapolis resident was accustomed to buying - not even your normal Minneapolis CEO. It was gargantuan, and at least according to some media reports, it contained its own car wash. (The car wash, apparently, was really only a high-pressure hose.)
To help him get rid of what was obviously a white elephant, American Express hired what it referred to in its proxy statement as a "third-party relocation service." This relocation service then saw to the completion of Mr. Golub's house and to its sale.
Completing a white elephant and then trying to sell same is a daunting task. So it should not some as a surprise that Mr. Golub's house could not be sold for what it cost to build. By the time the smoke cleared, Amex had ended up paying the relocation service $6 million.
Had Amex cut a check to Mr. Golub for $6 million to cover his dumb investment in a mansion containing, depending on what you hear, a car wash or a high-pressure hose, there is no question but that the company would have had to include a payment right up front in the proxy with all his other compensation. But I suppose that by not paying Mr. Golub directly but rather by paying the relocation service, the company figured that it could bury the $6 million payment in the dense prose of another proxy section. No matter, Mr. Golub ended up receiving $6 million of value. And his total pay package for 1993 rose to $17.6 million.
Doesn't it sort of take your breath away to watch a board of directors that one would have thought would have come off the Jimmy Robinson debacle overly chastened turn right around and pay his replacement virtually $18 million for not quite one year's work as CEO?
For my money, I would like to see two things happen. First, American Express' shareholders ought to send the entire board of directors packing. As to the replacement slate, how about drawing some names at random out of the Manhattan telephone directory - like Aardvark, Aaron, for openers? The new directors could not conceivably be any worse than the current board, and, because they are all New Yorkers, they won't incur much in the way of out-of-pocket expenses to get to meetings.
My second suggestion is to send Mr. Golub back to Minneapolis and make him buy his old house for what Amex paid for it. Then we can bring back Jimmy Robinson. After all, he must have learned his lesson. What's more, we can get him for only a couple mill a year. Of course, we do need to remember that it was the very same Mr. Robinson who, in seeking to lure Mr. Golub back to New York, offered him a no-loss deal on his Minneapolis home.