Fortune magazine has published an article titled "The Great CEO Pay Heist" about the compensation paid to America's CEOs. Penned by Geoffrey Colvin, the article takes a harsh tone from the beginning, and singles out Apple's CEO, Steve Jobs, as the symbol of the corporate executive ranks gone out of control:

If you want to understand America's out-of-control CEO pay machine--including Steve Jobs' recent $872 million options grant, by far the largest ever--start there.

The article then goes on to quote a variety of corporate personalities using phrases such as "outrageous," " unrelated to services rendered," "outside the charts," and " grossly high - astronomical." The article fails to tell us exactly what question to which these people are responding. As for Mr. Jobs' specific compensation package:

Apple's Steve Jobs got last year's mightiest pay package, valued by FORTUNE at $381 million. (For the purposes of calculating his 2000 package, we have valued his monstrous options grant at one-third the exercise price of the shares optioned. And, of course, we've included the $90 million Gulfstream the Apple board gave him.) How big is that? The last time the public got furious over CEO pay was in 1992, when reports of huge numbers for 1991 sparked a flurry of reform efforts. Yet the 14 highest-paid CEOs then, including such legendary mega-earners as Coca-Cola's Roberto Goizueta, Philip Morris' Hamish Maxwell, GE's Welch, and ITT's Rand Araskog, together earned less than Steve Jobs did last year all by himself (even without the plane!). Yes, it's true that Jobs has paid himself only $1 a year since he returned to Apple as CEO in 1997. And, yes, he deserves to be rewarded--handsomely--for bringing Apple back from the dead. But still ...

To add insult to injury, Mr. Colvin then includes Apple in a list of four companies that pay the bosses to much, but are "marginal to horrible performers." From the article:

The No. 1 earners in each of the past five years got packages valued cumulatively at nearly $1.4 billion (see chart), or $274 million on average. Yet far from delivering the superb results investors might have expected from the world's highest-priced management, four of the five companies have been marginal to horrible performers. They are Walt Disney, Cendant, Computer Associates, and Apple Computer.

Mr. Colvin's article is an interesting one, and it offers an excellent look at exactly how huge compensation packages came into being in the first place. He cites historical evidence, includes such esoteric aspects as how a baseball player's supreme court appeal affected this process, and shows us the changes in US law in the 1950s that made it all possible to begin with. The problem with it, or rather the problem I am going to talk about, is that Mr. Colvin failed to do adequate research when he singled out Steve Jobs as his whipping boy.

First of all, there was the opening quote I included above. Mr. Colvin offers Mr. Jobs' one-time grant of 10 million shares of AAPL as a yearly salary by implication. In fact, Mr. Jobs was awarded those options after about three years of making exactly US$1 a year, which the article alludes to by way of explaining that the US$381 million figure he is using is the options plus the jet, divided by three. The problem with this is that those options are still paying Mr. Jobs salary today, and Mr. Colvin knows it. It's been about 4.5 years since Mr. Jobs started working again at Apple, and he has earned about US$4.50 in cash during that time. Certainly Mr. Colvin points out this US$1 per year salary, but he is taking his pick of the data instead of presenting the entire story. To have offered this information in the way that Mr. Colvin did was disingenuous and sensational. Both are not things we expect from a publication of Fortune's calibre.

The author also tapped another unsavory tactic by selectively mixing his data when he said that Apple was a "marginal to horrible performer." If you look at Apple's stock price today, it has fallen from the highs set some 2 months after the options were granted. AAPL closed at 72.0938 (Split Adjusted) on March 22nd, 2000, and on June 15th, 2001 the stock closed at 20.44, a 71% fall in the value of the stock. Though still about 220% higher than when Steve Jobs took over Apple, AAPL has indeed been a poor performer in the last 15 months. When the options were granted, however, the stock value of the company had risen by some 800%. From Apple's press release announcing the options (which is freely available at Apple's PR site):

"Apple's market cap has risen from less than $2 billion to over $16 billion under Steve's leadership since his return to the Company two and a half years ago," said Apple Board member Ed Woolard. "Steve has taken no compensation thus far, and we are therefore delighted to give him this airplane in appreciation of the great job he has done for our shareholders during this period."

"Steve's stock options were granted a week ago at the then-market price, and will gain value only as Apple's stock price rises, to the benefit of all shareholders," said Apple Board member Jerry York. "This grant reflects Steve's and the Board's confidence in the future value of Apple."

Is an 800% gain the mark of a marginal or horrible performer? NEIN! To summarize, Mr. Colvin uses the juiciest year of salary as a standalone measurement, and either considers an 800% gain in stock price as marginal-to-horrible, or he used the stock price data that has accumulated *since* the granting of the options to say the options were unrealistic. Either way, we are sad to see a publication of Fortune's stature use such sensational tactics.

On top of all this, it is also important to remember that when Mr. Jobs was granted those options they were actually worth nothing. They were granted at the then-stock price, and only achieved value if the stock rose (they are worth less than nothing today as the stock has fallen below the more or less US$45 per share price at which they were granted). This is unheard of in most CEO compensation packages where options are typically granted at a price lower than that of the current market price. In fact, much of Mr. Colvin's article deals with that very issue of compensation not actually being tied to performance, but he never once mentions that Mr. Jobs' package is the exception to this rule.

We won't even get into the fact that Apple's share decline comes not because of Mr. Jobs' leadership but from a downturn in the industry and that Apple has so far handled that downturn far better than any other PC company. In fact, we feel it safe to say that without Mr. Jobs' leadership, there would likely be no shareholder value today because Apple would likely have closed up shop in some way or another.

Is there a problem with CEO compensation? Yes. Look at Apple's past CEOs who all had golden parachute clauses that rewarded them for being fired. There are numerous other examples in Mr. Colvin's articles, and this is certainly an issue that shareholder should pay attention to, but I assert that Steve Jobs' compensation package was a poor example of this problem, and that he has earned every cent.

We have a thread on this issue at the Apple Finance Board; feel free to hop on over and join in the discussion. My thanks to Observer H.R. for alerting me to this article.