Business Update with Mark Lacter

Herbalife CEO rakes in the cash during 2011

KPCC's business analyst Mark Lacter tells us an executive from LA had a very lucrative year.

Steve Julian: Mark, we were talking yesterday about highly-paid college presidents in Southern California. Let's talk about the highest-paid CEOs - and there's a local name on top.

Mark Lacter: His name is Michael Johnson, he's chief executive of L.A.-based Herbalife, the maker of those nutritional supplements - and last year his total pay was almost $90 million, which is believed to be the highest compensation for a U.S. executive in 2011. (Not all companies have reported their numbers, so it's possible another CEO might beat Johnson, but clearly he’s at the top end.) And the reason he's at the top end is that of the $90 million, $77 million is the result of Johnson exercising his stock options late last year.

Julian: Nothing wrong with that.

Lacter: No, it's perfectly fine for a company granting stock options to senior executives. It's a time-tested way to attract talented people. Tech startups do it all the time. The way it works in basic terms is that companies will grant the employee a stock option at a certain price - let's say $10 a share. The employee will then be able to exercise the option at some future date and convert it to stock - presumably at a point when the price is a lot higher than $10 a share, let's say sixty or eighty dollars. If you have thousands of options, you can see how the profits add up. In the case of Michael Johnson, most of the stock options were granted by Herbalife between 2003 and 2005, which is when he was new to the company - and the stock was trading at eight or nine bucks a share.

Julian: And when he sold?

Lacter: By late last year, the stock was trading at around $60 a share. So he obviously did very well, though so did Herbalife shareholders who had been holding onto the stock all that time. And that's why stock options can be such a powerful incentive: If the company does well, then the CEO does well. The problem is that CEOs will sometimes make decisions that provide a short-term boost in the stock price, but not always be in the long-term interests of the company. And sometimes CEOs will arrange their compensation deals so they'll always make good money, even when the stock is not doing well. And that's when shareholders tend to get upset.

Julian: Funny thing is, Herbalife isn't that big company - didn't even make the Fortune 500.

Lacter: Quite a ways off, Steve - but then again, not many local corporations made the list. Just 19 of the Fortune 500 are based in Southern California - and only four of those are in the city of L.A. The largest locally-based company on the Fortune list is Disney, which has its headquarters in Burbank. It’s at number 66. (Exxon Mobil is tops on the list.)

Julian: LA never really had a lot of BIG corporations, did it?

Lacter: No, it never did. New York, Chicago, and even San Francisco are considered more corporate towns, and if anything the numbers have gotten smaller over the years, what with mergers and relocations. Keep in mind, though, that just because big companies aren’t headquartered here doesn't mean that they’re not coming here. Good example is Target, which ranks number 38 on the Fortune list. It employs roughly 15,000 people in L.A. County, and will be hiring even more folks when it opens several additional stores (downtown among them).

Julian: Are these going to be Target stores as we know them?

Lacter: Not exactly. They’re calling them City Targets, and they’re quite a bit smaller and stocked with items that are aimed at an urban customer. So you'll see lots of groceries and household items. Walmart is also coming to L.A. (they’re making a big push to open in several locations, including Chinatown), and the stores will probably look more like a supermarket than a regular Walmart. These huge retailers have run out of desirable space in the suburban areas and so urban areas like downtown are looking a lot more attractive. Point is, these out-of-town businesses play a very important part of the local economy. They need us, we want them.

Julian: That's what Walmart says in Burbank, too.

Lacter: That's right, there's another one.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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