Intellectual Property. Russell L. Parr

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Intellectual Property - Russell L. Parr


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balance sheet for an acquired entity, the acquirer is required by accounting standards to record the fair value of the assets acquired and liabilities assumed. The premium paid—which is equal to the purchase price in excess of the acquired net tangible assets' fair value—must first be attributed to the fair value of identifiable intangible assets, such as customer lists and relationships, contracts, patents, and trademarks. Any excess premium is then recorded as goodwill.

      The assembled workforce asset charge is based on the value of an assembled workforce, measured as the cost to recruit and train a workforce to replace the existing service capacity of the acquired one. These calculations often have limitations.

      Consider one of the most expensive employees a company possesses—the chief executive officer (CEO). These individuals are the highest paid employees at almost all companies. They determine the strategic direction of a company and then drive all other executives and employees to execute their plan.

      It is common to think of these employees as the most important but studies show this assumption may be wrong.

      The chart following shows the poor relationship between the top 100 CEO compensation packages and the performance of their company's share price for 2017. CEO compensation is a combination of salary, bonus, perks, stock, and options.

      A positive 20% return can be obtained by paying a CEO over $100 million. The chart also shows the same performance and even more can be obtained from CEOs being provided a $20 million compensation package. While it would have been nice to see higher performance associated with higher compensation, the chart doesn't even come close to showing such a relationship.

Chart depicting the poor relationship between the top 100 CEO compensation packages and the performance of their company's share price for 2017.

      Corporate boards continue to try to tie CEO pay to company performance. Specifically, they want CEO pay to reflect improved company performance and shareholder returns. Great performance equals great pay. Poor performance equals lower pay and often the ouster of the CEO. In reality, CEO pay and performance often don't match up.

       CBS Corp. paid its chief, Leslie Moonves, $69.3 million last year; total shareholder return was negative 6.2%. His pay was virtually unchanged from $69.6 million in 2016 when the broadcaster achieved a one-year return of 37%.

       Allergan PLC's Brent Saunders received a 700% raise in 2017 to $32.8 million, despite total shareholder return of negative 21%. The compensation package came during a year when Allergan ran into patent setbacks for one of its best sellers, dry-eye drug Restasis, which contributed to a 22% drop in the firm's share price for the year.

       One of the biggest gaps between CEO pay and shareholder return was at aerospace-parts company TransDigm Group Inc. For much of the year, TransDigm's stock took a beating from short sellers who criticized its acquisition-driven business model, but the volatility had little effect on then-CEO Nicholas Howley's pay package. Shares, including reinvested dividends, returned just shy of 5% for the fiscal year that ended September 30, 2017, underperforming the broader S&P 500 index for the first time in a decade. During the same period, Mr. Howley earned $61 million, more than triple the $18.9 million he made in 2016.3

      An extreme and contradictory case of the value of a CEO involves LuluLemon Athletica. In June 2018, share prices of the company which sells “athleisure wear,” turning pricey women's yoga wear into mainstream fashion, were up nearly 15.5% at $121.26. This happened without a CEO.

      CEO Laurent Potdevin had a multi-year relationship with a female designer at the company he oversaw. This was one of the issues that caused his departure from the company on February 5, 2018. A company statement indicated that Potdevin “fell short of … standards of conduct.” LuluLemon did not find a replacement for the CEO job until July 2018 but during the interim the company prospered and the company share price soared.

      It can be argued that the strategic plan Potdevin put in place leading up to his departure fueled LuluLemon's success, but this brings up the question about the need for a high-paid CEO. Once a strategic plan is established, is there a need for a highly paid CEO? Companies may find that temporarily employing a strategic planning consultant to establish a plan, then leaving execution to other employees, can serve just as well as employing a high-priced centerpiece for the long haul.

      When considering the value of the CEO as part of an assembled workforce, their value may not be indicated by their compensation package unless it is supported by shareholder returns.

      The private actions of key company personnel have also had significant impact on company share prices. Sexual harassment accusations and other offensive behaviors have recently strained company share prices, further bringing into question the value of key personnel to a company. Consider the results of recent questionable behaviors by key personnel.

       POOR LANGUAGE BY PAPA JOHN'S CEO COST INVESTORS 43% IN STOCK VALUE

      John H. Schnatter is the founder of Papa John's International, Inc. He assumed the position of Papa John and was featured on national television commercials for the business. The company slogan is Better Ingredients, Better Pizza. Schnatter stepped down as CEO on January 1, 2018, after comments he made criticizing National Football League commissioner Roger Goodell for not doing anything about national anthem protests.

      In late 2016, some NFL players had started to kneel before the start of a game during the playing of the national anthem. The protests by players about racial injustice were divisive. While many people across the country, especially NFL fans, acknowledged the players' rights to protest, they also strongly felt that kneeling during the national anthem was beyond inappropriate. Members of the military and veterans thought the move by the players was disrespectful to their sacrifices. NFL leadership found itself in an impossible position and were slow to take a stand on the issue and even slower to develop a compromise.


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