The Wright Education Station™
on CEO pay and perk issues
Pay for Performance or Pay for Failure?
Mr. Robert B. Reich,
Secretary of Labor during the Clinton Administration. Currently Professor of Public Policy at the University of California at Berkeley.
Re: CEOs Deserve Their Pay – Article by Robert B. Reich. Wall Street Journal’s Sep 14, 2007 eastern edition pg. 13
Educational Editorial ©
by William M Wright BBA MBA - Window To Wall Street® 10-05-2007
Mr. Reich, your article presented a rational justification for todays CEO movie star style pay, using Exxon's recently retired CEO, Lee Raymond. I can understand your desire to win over the Wall Street Journal CEO Reader’s before your surprise closing statement.
We would consider it an honor if you would examine another pro-capitalist and shareholder point of view. Be sure to read the articles at the end of this editorial and view the video reports on CEO pay, perks and golden parachutes alone with the new CEO who spent $1.2 million to remodel his office during the worst financial crisis since the Great Depression. (continued below)
CEO Pay And Perks Soars While Workers And Shareholders Crash
No Outcry About CEO Pay In Japan
That's because most Japanese chief executives don't earn anywhere near the big paychecks of their Western counterparts. CEOs at Japan's top 100 companies by market capitalization earned an average of around $1.5 million, compared with $13.3 million for American CEOs and $6.6 million for European chief execs at companies with revenues of higher than $10 billion, according to an analysis of 2004-06 data by Towers Perrin, a Stamford (Conn.) human resources firm.
CEO Spends $1.2 Million On Office During Financial Crisis
Educational Editorial © continued from above
by William M Wright BBA MBA - Window To Wall Street® 10-05-2007
The summation of my point is: CEO pay is not a moral or ethical issue only a rational business cost containment issue.
Cost control and cost reduction are standard business principals used by CEO’s for outsourcing jobs and cutting worker wages and benefits to be competitive in a global economy. Shareholders’ see no rational cost controls on CEO compensation by American Boards. There is never a comparision to lower paid Asia, India and European CEO's.
Quid Pro Quo is just as true in the Board Room as in Politics. Compensation committies are made up of the highest wage earners seeking to go higher themselves. Giving the CEO a ton of pay and perks only helps to justify their next jumbo raise.
There are strong controls on average worker wages using words like "We have no budget for increases" or "Raises can not exceed inflation" or "The budget only allows a maximun increase of 4%". But at the very top you'll rarely hear those words. And in many cases it does not matter as you maybe lucky and have a contract guarnteed pay raise in advance of performance. You'll also have special severence and perks that no loyal 25 year employee could hope to obtain.
However, I do not believe excessive pay justifies excessive taxes (as in two wrongs do not make a right). Still, raising marginal tax brackets 2-3% as you suggest is much simpler than trying to pass morality legislation on CEO pay. I agree those few who have benefited so much from the Bush administration tax cuts should not complain about a little 2-3% point tax increase given their incomes have gone up 25%-50% while they contained average American worker pay to so little increases.
The Capitalist, business educated, free markets trader within me cries out for American Shareholder elected Boards to make more rational cost containment decisions about senior management pay and special perk compensation. The current system only encourages a two tier system that widens financial and moral inequities between senior management and all other management and workers below - to the point of legal discrimination.
For example - corporations have written severance pay policies (e.g. two weeks for ever year worked) but senior management gets to discriminate by giving themselves guaranteed one or two year severance compensation pay for leaving after working less than two years -instead of the two to four week standard severance pay.
Senior Management also gives themselves downsizing protection through golden parachute guarantees that average workers and managers never get. If these individuals were the creators and sole owners of the business then we could support this action. But they are not. These are individuals who have stewardship of shareholder money.
CEO pay is only the tip of a titanic size tax-free perk ice burger that has been growing larger for 30 years. In the last decade it reached the point of outrageous. You can bet shareholders will not be given presentations on how management is controlling these shareholders cost at Annual Meetings.
The list of special compensation perks ranging from free use of corporate jets (even in retirement) to interest free loans and guaranteed reimbursement for housing depreciation and income tax payment is ten miles long. Is it legal to give guaranteed excessive signing bounces and golden parachutes to senior executives? Yes. Is it morally or ethically correct? That depends upon which side of the fence you are on. Does it adhere to the basic business principle of rational cost control? Absolutely not!
Your rationalization for today’s over paid and over perked senior executives is basically: Today’s world is more complex and dynamic then 40 years ago. And you feel there is only a small talent pool to draw from of people with CEO experience. And given current investor returns CEO pay can be justified as totally rational, using the current case of Exxon Mobil’s CEO Lee Raymond pay and retirement compensation compared to the appreciation in Exxon’s stock value. Assuming this argument is reasonable; the very same thing can be said for the average Exxon Mobil worker. They are more educated, more productive and according to management in tight supply. Yet, those same Exxon Mobil workers never received even a reasonable proportionate increase in pay, perks and retirement compensation relative to CEO Lee Raymond (and the rest of Senior Management).
Why? Because that would be considered unreasonable pay increases by the CEO who rationalize they must control and reduce expenses.
Lets, be honest with shareholders. Exxon stock did not go up in value because of CEO Raymond. Exxon stock went up because oil increased from under $18 a barrel after the 1997 Asian Crisis to over $95 a barrel in 2007.
For those of us who invested before 2003 we recall when global markets can go down and investor’s lose money. You can bet no comparisons were ever made to learn if CEO pay declined as fast as NASD Stock values did in 2000-2002. And I would not expect Mr. Raymond’s salary to decline because Oil price declines caused Exxon profits and share price declines. A comparison to stock values is a metric used by senior management to rationalize outrageous pay on the upside but never used to lower their pay when stock values decline for a decade like Wal-Mart, Pfizer, GM or Ford.
Your argument that 30 years ago many industry oligopolies existed which made the CEO Job much easier makes a logical generalization from an Economic Professors’ rear-view mirror point of view. But I’ll bet many an old-timer CEO who served on the front lines in the 70'-80's, would disagree with your conclusion.
The world is constantly changing and business has never been static. Reality would suggest only a case by case examination of each CEO's job through history could make a reasonable judgment on which CEO jobs where easy and which more challenging. We would probable conclude degrees of challenge are not correlated to any years or pay.
Flash back to the 80’s when an out of work Ford Automotive legend like Lee Iacocca agreed to work for $1 annual salary and a lot of worthless Chrysler stock option paper. The Chrysler board made a brilliant decision to hire Iacocca and convince him to work for no salary and nothing guaranteed! Iacocca’s job and challenge then was greater than most of today’s CEO’s as Chrysler was on the verge of bankruptcy and America was not flush with cheap money and venture capitalist willing to make risky bets. Sure in-hind-sight it is easy to talk about the millions Iacocca made for being the Chrysler miracle worker. He was a CEO - Chrysler TV Salesman and American Moral Builder. His world was no less dynamic then today. And Iacocca’s challenges were certainly not reduced buy the fact “the big three Automotive oligopoly existed.” They were simply the last three American men standing.
Flash forward 35 years to Ford. Today’s lack of concern over cost control at the top (only the bottom) and those who benefit want shareholders to believe a “CEO is a Born Movie Star”. This thinking causes Ford after losing a record $13 billion in 2006 into hiring Alan Mulally away from Boeing. He is given a $7.5 million dollar bonus just for agreeing to get paid multi-millions annually to be CEO. He received $28 million for 4 months in 2006. For shareholder and union relations Ford likes to just point to Mulally only getting a messily $2 million salary. I do not every recall Mr. Mulally every being a big box office draw. Nor does Mr. Mulally come to Ford Motor with a insurance policy that guarantees’ success. He has no automotive experiance. And what has changed? Nothing. The stock is still at its 40 year low. Why? Because there is no quick fixes that Alan Mulally can accomplish faster or better than a lower paid CEO of another name. Mulally has done one thing that Wall Street analyst point to he made the decession to rename the new Ford Five-Hundered the Ford Taurus (both names were prior Ford names) after a ton of branding money had been spent in 2005 to launch the car as the Ford Five-Hundered. Sorry, but my 18 year old son could had come up with that idea for free. Shareholders needed to demand more from a $28 million dollar man.
Everyone inside any Fortune 1000 company will tell you there are always qualified talented people inside the company who could do the same job for far less shareholder expense. But the rationalization never is one of cost control at the top. It becomes one of political and philosophical posturing. It becomes a popularity contest with lots of upfront cash guarantees’ given away before an ounce of accomplishments in the job!
Just like professional athletes the job and work challenges today’s CEO’s face are no more difficult. They are just much more financial rewarding with far less risk and worry about being out of work -given today’s platinum parachute and up-front (no accomplishments required) jumbo million dollar signing bonus. Yes, there is one big exception, CEO’s are getting so much money pouring in from so many contract guarantees’ that today’s CEO’s need to have personal CPA’s, Lawyers and Money Managers on retainer just to count and manage their money. Iacocca never had that problem in the 70’s.
There is no shortage of talented CEO / Management material in America. There is a surplus of management talent. American downsizing, mergers and businesses moved to China, India and Mexico has left a large reserve of under utilized senior level managers with advanced technical and business degree education between the ages of 50-60. Some out of work (calling themselves retired rather than unemployed) or grossly underemployed. The shortage is myths created by those who benefit from having people believe it. Robert Nardelli is a good man, but it makes no sense to pay a man with no automotive experience to be CEO over the highly regarded automotive man, Tommy La Sorda who’s already been running Chrysler as its President.
Cerberus Capital is private - so we should have no shareholder or public rights to question the wisdom of their decision with their money. I’m only using this as a current example of what often happens in today’s world. Today corporations can easily rationalize what years ago they would have considered illogical thinking.
There is no shortage of human management capital - only rational business sense to control top level expenses. Thousands of qualified experienced American managers get turned down annually for jobs in other industries under the logic “you have no management experience in our industry.” Age discrimination is also a key variable in keeping the shortage myth alive. It is a known physiological tendency for human managers to not hire managers older than themselves. Mid-to first VP level Fortune 1000 management with average ages ranging from 35-45 rarely hire qualified downsized / outsource highly educated and qualified displaced workers above age 50.
While America gives lip service to age-discrimination, even famous CEO’s like GE's Jack Welch (retired) openly talks about how Jeff Emil’s younger age was a critical metric for his board recommendation to select Jeff over two older alternatives. Jeff Immelt is a great leader at any age, but J. Welch’s public discussion about how hiring decisions should be based upon age shows how little progress America has made in the non-existent war against age discrimination.
Everyone reporting on the CEO pay story assumes the CEO is the corporations MVP 24/7. The CEO is the person that gets to fly around the country in the Corporate Jet doing all kinds of fun things while the worker bees keep the company running. Senior management wages and profits are soaring at McDonalds. But we hear no multi-million dollar annual salaried CEO supporting a minimum wage increase after eight years of no raise - while their pay went up 30%. Is that American Super-Capitalism or an American Super-Size-Self-Centered-CEO mentality? Even Michael Jordan couldn’t win one NBA basket ball game it he was the only man on the court.
Exxon Mobil's Mr. Raymond was no J Paul Getty, he did not created Exxon - he inherited Exxon. As an American business educated investor of thirty years, I would say the person who created the empire is worth far more to shareholders and workers (whose jobs they created) then the person who inherits the stewardship of the business and excessive perks.
Cornelius Vanderbilt, Henry Ford, Howard Hughes, J Paul Getty, J P Morgan, Andrew Carnegie, Bill Gates, Paul Allen, Steve Jobs, Michael Dell and The Google Boys, these are examples of Business Rock Stars (along with their financial stakeholders) of exceptional vision and determination who created new American products, services, jobs and industries to compete in a global economy. These are the people that created jobs and shareholder value, not the over paid and over perked sheep herder CEO’s with their company paid country club senior management buddies. They should consider it a privilege to inherit such wealth created by others before them. They were not born CEO’s they were simply fortunate individuals who were just one of thousands that could do the same job.
Here are other considerations to think about on the topic of CEO pay:
No CEO controls the industry environment or the stock market. Exxon stock went up not because of Mr. Raymond but because Oil when from $15 a barrel to $95 a barrel. No-Rocket Scientist was needed to turn around Exxon Mobil.
Comparisons of CEO’s pay to professional athletes pay are common, but the logic is weak. Tiger Woods wins tournaments’ all by himself. And Tiger may only get paid if he places high within the tournament. It would be rare to name any super high paid athletic in any sport and say what did they by themselves and/or with the team accomplish and not have a good answer. I could give you a list of over paid and over perked CEO’s (and senior management) who accomplish little other than getting rich at shareholder expense.
The same is true with comparisons of CEO’s to movie stars. People pay money to see the story because of all the paid marketing promotions capturing their attention. None of that hype was create or paid for by the movie star. Movie Stars are not born they are made by Hollywood.
Yes, the movie star has skills and will draw in loyal fans too. But I buy Exxon gas weekly not because I want to see Mr. Raymond at the pump, but because it is close to my house. Gasoline is a commodity and any women will tell you, Mr. Raymond is no Clark Gable or Tom Curise !
What about comparisons of Pfizer past CEO. The stock declined 60% in value yet the CEO’s pay went up more than 60% during his CEO tenure. Consider the CEO of UnitedHealth whose stock option values were worth over $1 billion. The stock went up in value for a simple reason they raise prices every year.
You can hire any self-proclaimed “compensation expert” to rationalize any compensation. But that does not mean hundreds of other qualified canadates would not be happy to do the job for millions less.
You will always find management discussion about what they are doing to control cost or lower cost but why no discussion on controlling senior management pay and perk cost? This shareholder does not believe in Government Wage Control or Federal tax rates in excessive of 35%. But the facts clearly show that either senior management is grossly overpaid and over perked….or average workers are grossly underpaid. And it could be a combination of both.
The Wright Solution®: Treat a CEO opening like any other job. Request open applications with the range of compenstation expected by each applicant to enable the selection person(s) to consider rational business cost vs. benefits prior to a final selection.
Listen to these few 2006 examples of outrageous management compensation and perks paid by shareholders. Ask your-self would these be approved if put to a shareholder vote of even high networth individuals? If these were part of required Annual Shareholder Meeting decisions on controlling senior management expense would American shareholder agree these are reasonable and rational business practices?
http://www.youtube.com/watch?v=58KRKrnkiTg
The Wright Business Mantra #5:
“What gets managed gets controlled.” And “He who controls the agenda, controls what gets managed.”
The Wright Solution®: The SEC should simply require limited Management Compensation and Special Perk Cost discussions at shareholder meetings and in Annual Reports.
This is the simplest (non-government intervention) method of shining the light on this closed door management secret to shareholders. While it would give shareholders no more control over compensation it enables a forum for shareholders to discuss these examples at public Annual Meetings.
I believe more public shareholder discussions on how reasonable and rational senior management compensation are to shareholder stock prices would be the ideal marriage of American Capitalism, Shareholder Empowerment and Democratic Principals.
By William M Wright
Window To Wall Street®
Excerpts from Recent Articles:
How Runaway CEO Pay Helped Fuel the Crisis
AFL-CIO Articles & Research on CEO Pay -2008
Over the past several years, CEO pay has exploded at many of the companies responsible for creating the subprime mortgage crisis. Too often, their compensation programs encouraged corporate executives to maximize short-term financial gains at the expense of long-term sustainability. In effect, boards of directors rewarded their CEOs for generating financial results that were often based on taking on irresponsible levels of subprime mortgage risk.
For example, large stock option grants encouraged excessive risk-taking by CEOs to maximize their potential gains through short-term stock price increases. Stock options promise executives all the benefit of share price increases with none of the downside risk. In the worst case scenario, the stock options will expire worthless. In effect, stock options allow executives to gamble with their shareholders’ money at no risk to themselves.
Too many CEOs have their incentive compensation tied to performance measures that rewarded financial results without regard to the risk involved in generating those results. At some companies, focusing on revenue growth encouraged CEOs to expand into the subprime lending business at the peak of the real estate market. Return on equity, another popular performance measure for CEO pay, encouraged executives to use increased leverage.
The pay packages of CEOs at mortgage lenders and investment banks also were sheltered from the inevitable decline in the real estate market because many of them were not required to hold their equity awards for the long term. This allowed CEOs to cash out before the bubble collapsed. Large golden parachutes further insulated CEOs from the financial risk of catastrophic results.
The Nightly Business Report – 04/10/2007
Reigning In CEO Pay & Perks
by SUSIE GHARIB
The average CEO received nearly $200,000 in perks last year. But there are extremes. For example, corporate governance researchers at the corporate library say R. Chad Dreier, CEO of Ryland Group, whose compensation was $31 million, received an additional $7 million in perks and benefits. That included the payment of taxes on stock options grants, reimbursement for personal health and services and charitable donations made on his behalf.
http://www.pbs.org/nbr/site/onair/transcripts/070410c/
The New Yorker – The Financial Page 02/13/2006
OverCompensating
by James Surowiecki
According to the economists Lucian Bebchuk and Yaniv Grinstein, between 1993 and 2003 the top five executives at fifteen hundred companies in the U.S. were paid three hundred and fifty billion dollars. That level of pay makes sense only if it leads to better performance.
But plenty of executives are getting superstar pay for journeyman work. Lavish perks—ranging from personal use of the corporate jet to having the company cover the C.E.O.’s income taxes—remain ubiquitous.
More important, it’s becoming increasingly clear that, from a shareholder’s perspective, overpaid C.E.O.s aren’t just expensive; they’re downright destructive. One recent study of the market between 1992 and 2001 by economists at Rutgers and Penn State found that
the more a C.E.O. was paid, relative to his peers, the more likely his company was to underperform in the stock market. The economist
David Yermack, of N.Y.U.,
There are myriad ways in which excessive or poorly designed pay packages can do damage. “Golden parachutes,” which guarantee executives huge payoffs if their companies are acquired, may encourage them to sell out even when the company would be better off remaining independent. Conversely, according to a study by the finance professors Jarrad Harford and Kai Li, very highly paid executives are more likely than their peers to make acquisitions, and to receive major financial rewards for doing so, even when the acquisition ends up destroying corporate value.
http://www.newyorker.com/archive/2006/02/13/060213ta_talk_surowiecki
WSWS.org 04/14/2005
American CEOs Pocket Billions More in Pay
and Perks
by Jamie Chapman
Another survey of 200 large companies performed for the New York Times, found the average CEO compensation to be almost $10 million—excluding profits made on stock options—up 12 percent over 2003.
Meanwhile, the average full-time worker over age 25 struggles to get
by on a mere $683 a week, an increase of less than 1 percent over last year. At that rate, typical non-supervisory workers—who constitute 80 percent of the workforce—would have to work for more than 385 years
to achieve what the CEO brings home in just one.
Among the top earners last year was George David of United Technologies Corp. He cashed in $83.6 million of stock options, in addition to his straight compensation of $11.8 million for 2004. Lew Frankfort of Coach, Inc., a manufacturer of leather handbags and other fashion accessories, pocketed $84 million on stock options, along with a grant of an estimated $120 million worth in new ones.