Executive compensation and the case of Cisco's John Chambers

Executive compensation has become both a contentious issues throughout America. The financial crisis only exacerbated this issue by delving deep into the proponent of executive compensation. Does not actual business performance account for anything in regards to executive compensation? It is my position that executives should and can demand higher salaries simply because of the duties inherent in their position. However, the downside risk for top management, especially those of "too big to fail" institutions should also be corresponding high. I believe with the downside risk to managers elevated, our society can eliminate much of the unnecessary risk taking that has plagued it in the past. It is my position, that it is both illogical and irrational to have management with a position of massive influence over society and not have subsequent requirements on those individuals. The implications to society for greed and risk taking are simply too high, as evident by this last financial crisis, for individuals to act only in their own vested self-interest.

As a result of this excessive managerial compensation with no tangible business results, many CEO's have been replaced. These new CEO generally has unique thoughts and mindsets that make them attractive for particular corporations. Cisco systems are no different in this regard. As primarily a technology company, it relies heavily on innovation, ingenuity and business foresight. John T. Chambers provides all of this at a very high level as evident by his impression business record.

John T. Chambers

John T. Chambers as CEO of Cisco has grown the company from $1.2 billion in 1991 to is over $40 Billion in 2006 (1). Throughout the course of his 16-year tenure, Chamber has garnered much recognition for his accomplishments. Some of his awards include, "CEO of the year," "Award for corporate leadership," and many others (2). Chambers has also done much philanthropic work to benefit society as a whole. Some of his initiatives include leading a delegation of U.S. business leaders, in partnership with the U.S. State Department, to form the Partnership for Lebanon. This program provided construction resources to help reestablish infrastructure within Lebanon and its surrounding territories.

From his previous track record, it is difficult to predict with any certainty, future business transactions. For one, the industry in which Cisco engages in is rapidly changing. It is difficult to fathom what the future holds in regards to technical initiatives. As outsiders we can only speculate as to possible courses of action. This action in itself however, is usually only partly correct and should subsequently be taken with caution. If I were to speculate however, I would venture to say that Cisco's next move would be further innovation in the realm of cloud computing. Cloud computing is yet another innovation that is bound to reshape the manner in which consumers act on a daily basis. Since his inception as CEO, Chambers has consistently provided products and services in demand at a price point that is presumable fair to consumers. This is apparent by turning a $1 billion company into a $40 billion company. Undoubtedly the shareholders are pleased especially when this was done in the face of technical behemoths Microsoft and IBM. Cloud computing is no different in this regard. In the fiscal year ended July 31, 2010 Cisco Systems has spent approximately $5 billion on research and development expenditures (3). We can contrast this with Cisco's direct competitor Alcatel-Lucent who has research and development expenditures of roughly $3 billion (4). It is the nature of the business and economic cycle that some research and development expenditure will not produce worthwhile results. However, it is during this time of economic depression that presents a great opportunity for Cisco Systems. With interest rates at historic lows, Cisco has the means to borrow money at very low costs which can further aid in its research and development efforts. This extra $2 billion of research and development may seem excessive, but with Chambers track record, I believe these efforts will bear fruit in the near future. In what realm will these future profits be realized, only the management team and prominent shareholders will know exactly?

Further, if an outsider can predict the actions of a corporation with certainty that may present a red flag to management. The technology industry is predicated on innovation. If an outsider could know with certainty what Cisco is doing, one of two actions could subsequently occur. If the competitor has large enough capital, he can create and market the product first in an effort to gain first mover advantage. The company could also make a better product utilizing its superior competitive advantage in whatever realm it finds best suited to accomplish this. Second, a competitor can make the technology that was leaked and patent it to prevent Cisco from creating a similar product at all. Both of these actions will reduce profits, margins and market share. As a result in would be logical to keep many fine details concealed until the advantage is sealed. Apple is notorious for this. It will commercialize products that many individuals speculated on but didn't know with any certainty what the product would be. As a result of Apple's innovation, and secrecy it is now in the forefront of the technological world.

With the benefit of hindsight, we can however, view some of the changes enacted by Cisco Systems in the past. By venturing into the annual reports, we can see what methods and research and development initiative were successful and which were not. One important initiative that Cisco engaged in was one of cost controls. The early 2000's were marred by dotcom bust on the 1990's. Casco learned from this mistake and controlled excessive costs including inventory which can subsequently become outdated. One key fact, that since 2000, Cisco has continued to invest heavily in research and development. All of which will contribute to future earnings growth.

Leo Apotheker

Leo Apotheker has over 20 years of experience with SAP, where he most recently served as CEO. In addition, Leo has also spent 8 years on the executive board of SAP, where he served in various capacities. In addition to his over 20 years at SAP, Leo was also the co-founder of ISOFT BV which was one of the largest venture capital startups ever in Europe. Finally, Leo can speak 5 languages (English, Dutch, Hebrew, German, and French).

Out of the previous two CEO's, Apotheker has by far the most experience. What more intriguing is that he has experience with both the entrepreneurial and corporate aspects of business? This provides a competitive advantage for HP as it has further know how in regards to new venture planning. It can also recognize viable new enterprises better as a result of the knowledge gained from Apotheker. Finally, Apotheker has extensive international experience which is of extreme importance in our global economic environment. This again can be utilized for HP's benefit in the future, as Apotheker undoubtedly has extensive international contacts to help his business.

With Apotheker extensive experience, I would venture to say that HP will move internationally. This in my opinion would a large priority as its U.S. market is heavily saturated and congested. As a result, many companies are battling to attract the same customers. This corporate warfare can be extremely unprofitable as it reduced margins and subsequently profits. However, foreign markets, especially those of emerging nations provide a large untapped pool of potential clients and long-term customers. With HP being a low cost producer, this is especially important with nations with a rising middle class. HP has the ability and foreign contacts, due to Apotheker, that can make joint ventures rather profitable in the long run. Finally, by venturing overseas, HP has the opportunity to establish its brand recognition. As mentioned earlier, with software and hardware providers, it is very important to be a first mover to gain needed market share and customer satisfactions. Once established, it is often difficult and costly for competitors to take customers away from the established market leader in regard to software.

Senior Executives Cisco

CISCO 2010

CISCO 2000

CEO

John T. Chambers

John T. Chambers

CFO

Frank A. Calderoni

Larry R. Carter

VP of Operations

Randall E. Pond

Gary J. Daichendt

Head of Joint Ventures, Director, Chairman of Fin. Committee and Chairman of Acquisition Committee

Michael D. Capellas

Mario Mazzola

Exec. VP of Worldwide Operations

Rob Lloyd

Carl Redfield

Senior Executives Juniper Networks Inc.

JNPR- 2010

JNPR- 2000

Chairman, Pres and Member of Stock Repurchase Committee

Scott G. Kriens

Scott G. Kreins

Chief Exec. Officer, Director, Member of Offering Committee and Member of Stock Committee

Kevin R. Johnson

Scott G. Kreins

Co-Founder, Vice Chairman and Chief Technical Officer

Pradeep Sindhu Ph.D

Pradeep Sindhu Ph.D

Chief Financial Officer, Exec. VP, Member of Concerns Committee and Member of Stock Committee

Robyn M. Denholm

Marcel Gani

Exec. VP and Gen. Mang. Of Device & Network Services

Mark Bauhaus

Steven Halay

Senior Executives Hewlett-Packard Company

HPQ 2010

HPQ 2000

Chief Financial Officer and Exec. VP

Catherine A. Lesjak

Robert Wayman

Exec. VP of Imaging & Printing Group

Vyomesh I. Joshi

Carolyn Ticknor

Exec. VP of Personal Systems Group

Todd Bradley

Ann Baskins

Chief Exec. Officer, Pres

L Apotheker

Carly Fiorina

Chief Strategy & Technology Officer and Exec. VP

Shane V. Robison

Michael Rose