How did Herbalife's CEO become the nation's top-paid executive?

herbalife.jpgNo big mystery - Michael Johnson's total 2011 compensation of $89.4 million included $77 million from the exercise of stock options late last year. Most of those options had been awarded between 2003 and 2005, when shares of L.A.-based Herbalife were trading below $10. The stock did quite well in the ensuing years. Johnson's haul, however, would have been a good deal smaller had he exercised those options today; Herbalife stock took a nosedive on Tuesday after a hedge fund manager - and prominent short seller - asked several pointed questions during a conference call about the way products are distributed to consumers (check out the chart on the left). From the WSJ:

The company's first quarter results, reported late Monday, did not include any breakdown of distributor sales. The company's website says a distributor can earn up to 73% of product revenues and noted supervisors, who oversee distributors, earned $2.4 billion in commissions and other payments. Einhorn on the call probed for more details about how many of the products the distributors hold are actually sold to consumers. Herbalife executives told him they have what is essentially a rule of thumb that says 70% are sold to customers, or just consumed by the actual distributors who purchase the products at discounts. The company said it doesn't have an exact percentage because it doesn't have "visibility to that level of detail."

None of that might seem like a big deal, but Wall Street went nuts over the exchange, with the stock taking a 20 percent tumble. Today it's down another 12 percent. That's why it's a good thing Johnson exercised those options late last year. More background from The Guardian:

Herbalife, best known for nutritional shakes, is a multi-level marketing (MLM) company - a company in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit. MLM firms have also been called pyramid-selling companies, though Herbalife denies the term is applicable to its marketing practices. Herbalife has reportedly spent $3.65m lobbying the US Congress over the last 10 years or so in an attempt to soften regulations applying to MLM companies.

By the way, Johnson's position as highest-paid CEO is based on a preliminary tally by GMI (still many more proxy statements to be filed). As in 2010, the big increases in compensation were largely driven by options.

Chart: NYT

More by Mark Lacter:
American-US Air settlement with DOJ includes small tweak at LAX
Socal housing market going nowhere fast
Amazon keeps pushing for faster L.A. delivery
Another rugged quarter for Tribune Co. papers
How does Stanford compete with the big boys?
Those awful infographics that promise to explain and only distort
Best to low-ball today's employment report
Further fallout from airport shootings
Crazy opening for Twitter*
Should Twitter be valued at $18 billion?
Recent stories:
Letter from Down Under: Welcome to the Homogenocene
One last Florida photo
Signs of Saturday: No refund
'I Am Woman,' hear them roar
Bobcat crossing

New at LA Observed
On the Media Page
Go to Media

On the Politics Page
Go to Politics
Arts and culture

Sign up for daily email from LA Observed

Enter your email address:

Delivered by FeedBurner

Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
LA Observed on Twitter and Facebook