IBM’s Executives Cash In While The Company’s Business Declines
It’s time to speak up about the ridiculous executive compensation at IBM.
I’m not a huge NFL fan, but I do know that if a team loses every single regular season game, their head coach should probably start updating his resúme.
In corporate America, however, that’s not exactly how things work.
Take Ginni Rometty, for instance, who took over as the CEO of IBM in January 2012. After overseeing 15 consecutive quarters of declining revenue and profit margins that fell 15 percent from 2014 to 2015, Rometty actually scored big.
How? She was awarded a $4.5 million bonus, bringing her total 2015 compensation to $19.8 million. It seems her poor performance paid off!
Rometty is far from the highest-paid executive in America (she ranks about 56th according to Equilar, which tracks CEO pay) but Rometty’s compensation, in particular, fascinates me because of the sheer magnitude and scope of problems within the halls of Big Blue.
As I have reported in previous articles, IBM is currently struggling with several key (and some might say) controversial issues.
For one, the business is swept up in several overseas bribery and accounting scandals. Two, we strongly believe the company made a $2 billion mistake by buying SoftLayer, a small-potatoes cloud business. And third, the company is absolutely floundering in cloud — they have no major clients, and consistently losing contracts to AWS.
In any company, especially a public company that’s accountable to shareholders and investors, compensation for executives must reflect the company’s performance. If the company is doing poorly, why should executives be rewarded with multi-million dollar bonuses?
The answer, at least in part, is that many executives (Rometty included) have realized there are ways to shortcut the system. For instance, by repurchasing company shares through stock buybacks, a corporate board can artificially inflate the company’s earnings per share prices. And since compensation bonuses are often calculated using EPS performance, a corporate executive can essentially manufacture their own bonuses.
IBM, in particular, uses buybacks to the extreme: 14% of the company’s revenue was used on stock buybacks within the first two years of Rometty’s tenure. Since 2013, IBM has spent more than $45 billion on buybacks, all while the company’s revenue and profit margins continue to decline. (Earlier this year, IBM’s board implemented new measures for its executives to abuse buybacks for their own financial gain.)
Since 2013, IBM has spent more than $45 billion on buybacks, all while the company’s revenue and profit margins continue to decline.
But it’s not just the buybacks that bother me. For the last five years, IBM has a weakening value proposition, declining assets, and laid off thousands of workers. Meanwhile, their $20 EPS “road map,” was an admitted failure, they completely missed the boat on shifting their mainframe business to the cloud, and the company also clearly has issues with internal controls, because of their track record with bribery cases overseas.
Some, including myself, believe the company even misled investors about their prowess in the cloud and half-baked “strategic imperatives” with misleading growth rates. And all while this was happening, IBM’s top brass was reaping rewards? That’s ridiculous. Martin Schroeter, the company’s CFO, made $13 million in 2015, up from $5 million in 2014. In fact, total executive compensation grew 57% from 2014 to 2015, all while the company’s core business declined.
I’m not the only one talking about this. Michael Hiltzik, finance columnist of the LA Times, wrote earlier this year that:
“For IBM shareholders, Ginni Rometty’s four-year reign as chief executive officer hasn’t been anything to go to Disneyland about. But her company has become a leader in one corporate category: board members willing to shovel incentive pay at a CEO turning in a mediocre performance.”
Now, if I was an IBM investor (which I am not), I’d have to wonder: Between the mediocre performance and all the big blunders along the way, why is Ginni still making $19 million per year?
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