lofhay

Are stockholders being ripped off by excessive executive compensation?

The compensation paid to the CEOs of some of the largest banks and auto manufacturers, all of whom have been having big problems with profitability recently, were reportedly:

Vikram Pandit of Citigroup: $ 38,237,437 in 2008*
Kenneth Lewis of Bank of America: 9,857,723 in 2008*
Jeffrey Immelt of General Electric: 9,280,935 in 2008*
Richard Wagoner of General Motors: 19,761,874 in 2007*
Alan Mulally of Ford Motor Co.: 22,750,385 in 2007*

(*I am using these figures because they were the ones available at 2009 Executive PayWatch[/url] website. Some of the pay was down from the previous year, and some was up.)

Executive compensation at all corporations is determined by the corporation’s board of directors, the members of which are largely executives of other corporations. The explanation usually given by the directors for arriving at executive compensation packages goes something like this: “We looked at what other corporations of comparable size and business are paying and came up with what we believe to be competetive and would help us to retain good people.”

For the sake of debate here, let’s say that I am serving as a director on the Board of XYZ Corp. and I am appointed to the committee on executive compensation. Let’s say that the chairperson proposes a package for the CEO which amounts to $15 million, and says that his survey of what other similar corporations are paying their CEOs show this to be in line with theirs, or slightly better, “in order to keep our good man from going elsewhere”. Now also assume that I am the CEO of PQR Corp. and my compensation package is approximately $15 million. How likely is it that I will say, “No, this is too much because we can get a good CEO for less cost” when I know that this might start a trend which could result in my own compensation being cut? Talk about a conflict of interest!

The result of such a system as presently exists is an ever upward spiral of executive compensation, a guaranteed pay raise every year or every time the employment contract comes up for renewal---all regardless of whether or not the business makes any profit for the stockholders. Yes, the employment contracts usually ostensibly tie bonuses to “performance”, whatever that means. But, there is apparently no direct connection between bonuses and corporate profits, else how could large bonuses be paid in years when the corporation either lost money or made little or no profits?

The fair way to determine executives compensation (fair to the executive and fair to the stockholder) would be to pay a base salary of not more than 100 times the average non-executive wages paid by the company (in many companies this has been running at over 300 times), plus a bonus of say 1% of the latest 5-year average profit to be divided amongst all the executive officers.

Surely any person not willing to act as CEO (or President or CFO, etc) for such compensation could be replaced by another very competent person who is willing to work under such a plan, even though present day executives would have us believe otherwise. Those self-aggrandizing execs now in office want stockholders to think that they couldn’t find competent people to head these corporations without the inducement of exhorbitant, (in my opinion, undeserved) compensation. I ask, why not? Where will the likes of Pandit, Lewis, Immelt, Wagoner and Mulally go if they are offered salaries of 1/5 their present ones and put on a profit sharing basis for any bonuses? Who is going to hire them at anything better than this? And if others did hire them, why couldn’t any number of people, who are now being paid 1/10 the compensation paid by the big corporations, be hired to take over the job at 1/5 the present levels? To think otherwise is to believe that there are only a few dozen brains in existence that could do the job and do it right.