Occidental CEO Ray Irani is the poster child for extravagant executive pay

A couple of weeks ago this column sounded off about the outrageous pay of Occidental Petroleum CEO Ray Irani, triggering numerous responses from his defenders.

Those ranks include former California Gov. Gray Davis. In an online op-ed for The Times, Davis wrote that under Irani’s leadership Occidental has been a “tremendous asset” to California and that Oxy’s shareholders have profited immensely over the years.

What really ticked off Davis, however — and I assume he was speaking for Irani, who has been a client of his law firm — was my linking the scandal of executive pay to the municipal scandal in Bell, whose city fathers have been haled into court to face fraud charges. That comparison, Davis admonished, was “over the top.”

Yes, I owe an apology for that column … to my readers. I didn’t do justice to Ray Irani’s compensation. It’s worse than I let on.

I mentioned that Irani’s compensation could exceed $56 million this year, but not that it has been estimated at more than $850 million over the last decade. Or that his payout has averaged three times that of comparable companies in the oil and gas industry. Or that Oxy’s pay practices put it in the cross hairs of activist investors, in part because the incentive thresholds that turbocharge Irani’s payouts have been set so low.

Two institutional investors, the California State Teachers Retirement System (CalSTRS), and Relational Investors, launched a proxy contest this year to name at least four new directors to the Oxy board in 2011. “CEO pay at Occidental functions essentially as a corporate giveaway program,” they wrote in a July 30 letter to the board, which they said suffers from “entrenchment and ossification.”

At the firm’s last annual meeting in May, a majority of Oxy shareholders voted disapproval of the company’s compensation plan — making it one of only three companies to suffer such a rebuff, out of 120 that gave shareholders the vote.

The vote was nonbinding, but as Anne E. Sheehan, director of corporate governance at CalSTRS, told me: “I don’t think [Occidental] fully appreciated the concern shareholders had, until then.”

After the vote, the board finally got serious about ratcheting back executive pay, announcing last week that in the future Irani’s maximum incentive payout will be about $25 million based on Oxy’s current share price, down from more than $90 million. His anointed successor, Chief Operating Officer Stephen I. Chazen, will get a similar haircut.

Yet the new incentive terms only prove again how hard it is to rein in executive pay.

For example, one-fifth of the incentive payout will be forfeited by the executives if Oxy fails to rack up total profits of $10 billion between now and Sept. 30, 2017. That sounds like a tall order. But over the last year, Oxy’s profits have been running at about $1 billion per quarter.

In other words, the executives have been given seven years to hit a target they’re on track to reach in 2 1/2 years.

The rest of the incentive package maxes out if Oxy’s total shareholder return (stock appreciation plus dividends) ranks first among its 12 “peer companies” over the next three years and beats the S&P 500. Is that a tough call?

Oxy’s total return for the last three years sat safely at the top of that list, according to Bloomberg; in fact, Oxy could drop down to the middle of the pack three years from now and the executives could still collect 40% of their bonus.

The changes led CalSTRS and Relational Investors, a firm that targets companies that are underperforming because of poor governance or other factors, to declare victory. (They’ll be offered one board seat, too.) Now, Sheehan says, “we’ll continue to push them to make sure that the targets really are ‘stretch’ targets.”

Occidental defends Irani’s pay by noting that the company has made a mint for shareholders during his tenure. That’s certainly true; the question, however, is what the appropriate compensation should be for that performance.

Some defenders of executive pay point out that the biggest Hollywood and sports stars get paid even more than corporate titans for work that is arguably frivolous.

Perhaps they do, but the market forces that determine pay for entertainment and sports stars seem a lot more efficient than those guiding CEO compensation. That $30-million movie star whose picture bombs? He doesn’t get $30 million anymore. (Bye-bye, Kevin Costner, bye-bye.) The $30-million CEO whose performance bombs? He or she gets another $30 million to go away.

Or the CEO gets a nice chunk of change as a signing bonus from someone else. Last month, the Hewlett-Packard board awarded its new CEO, Leo Apotheker, a pay package that could be worth well more than $50 million, including incentives, over the next three years. At his last company, the German software giant SAP, Apotheker lasted seven months as CEO. (To be fair, he had been co-CEO for about a year before that.)

Apotheker has never run an American corporation, much less a company as diversified as HP, and according to reports he may have been the board’s fourth choice. You want to tell me he couldn’t be had for a package topping out at $30 million? How about $15 million, and we’ll talk three years from now?

The remedies for the disease of executive elephantiasis are few. Shareholder democracy has obvious limitations. Shareholders who become disaffected with management often vote with their feet rather than with their proxies — they don’t stick around to register their disapproval directly. So the “say-on-pay” rule Congress wrote into the recent financial reform act is a good start, but only a start. The rule requires public corporations to give shareholders a nonbinding vote on executive pay at least once every three years, starting next year.

Taxpayers, who subsidize these huge payoffs through the tax deduction corporations take for them, have a remedy: Close the loophole allowing companies to deduct executive compensation in excess of $1 million as long as the overage is tied to executive “performance.”

Did I say “loophole”? I meant “six-lane vehicular tunnel.” Bogus performance incentives probably rank as the No. 1 executive compensation abuse.

So here’s a suggestion: Allow companies to deduct $1 million in executive pay, period. Alternatively, set the limit at a given multiple of a company’s average worker salary — say 40 to 1, the ratio prevailing in corporate America in 1980.

Pay your folks an average of $75,000, and you can deduct $1.5 million of your CEO’s salary. Anything over that, your shareholders cover the full freight, without the taxpayers’ help. (This might even help drive up salaries for the rank and file.)

Barring some similarly dramatic step, here’s betting that we haven’t seen an end of extravagant executive pay. Occidental Petroleum may hope that Ray Irani is no longer the poster child for the practice, but I haven’t taken his picture down from my wall yet.

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.