CEO’s Pay Can Be Great Indicator $BHI $HAL $NOV $SLB $WFT

There are many aspects to look at when choosing your investments.  We present a few that tend to help narrow the choices while showing which ones would be great investments or be losers in the long run.  Although we only cover a couple here these points can be applied to most public companies.

Management matters.

I will look at 5 oil service companies: Baker Hughes, Inc. (NYSE: BHI), Halliburton Co. (NYSE: HAL), National Oilwell Varco, Inc. (NYSE: NOV), Schlumberger NV (NYSE: SLB) and Weatherford International Ltd. (NYSE: WFT) and show that those with CEO compensation practices more attuned with investors delivered higher returns over the previous 3-year period and also YTD.


Total Shareholder Return during 2009-2011 and Year-To-Date (YTD)

Total Shareholder Return (TSR) includes both price appreciation and dividends received. Of these five companies, four pay dividends, only Weatherford does not. Of the four dividend payers, two—National Oilwell-Varco and Schlumberger–increased their dividends between 2009-2011. The chart below compares the 3-year TSR with total CEO compensation.

Of the five, National Oilwell Varco provided the highest TSR while paying its CEO the least, while Weatherford delivered the lowest TSR and paid its CEO the most. This performance trend is continuing this year also.

CEO Compensation Practices in 2009-2011

All five companies divide CEO compensation into two parts—short-term, generally cash and perks, and long-term, stock and option grants and pension benefits. Our top performers, National Oilwell Varco and Halliburton use more investor friendly metrics. Although NOV bases short-term compensation on EBIT as does Baker Hughes, they adjust the bonus paid by as much as 25% depending on whether Capital Employed (which they define as total assets – cash – total liabilites + debt) exceeds the target (bad), or is less than the target (good). Halliburton employs a similar approach, using Return on Capital Employed (ROCE). Schlumberger and Weatherford use EPS targets which have been criticized for being easily managed.

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