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.

ratbastid

Wow. I've never heard quite so plainly-stated a plan for the commoditization of C-level leadership. I like it a lot.

Really... how much talent does it take to drive GM into bankruptcy? Shouldn't the highest-flying high-flier be ultimately accountable when the bank they run tanks, or poisons the economy with crap paper?

My former CEO, Ken Thompson, was ousted by the board of Wachovia after his personally-pushed-through purchase of shit-backed-security-peddler Golden West Financial hobbled Wachovia and drove it into a fire-sale to Wells Fargo, destroying a 100-year-old brand. Thompson made about $15 mil in 2008. Oh, and his severence package? $1.45 million in cash and accelerated vesting of $7.25 million in restricted stock. I think I could do no worse, and I'd do it quite happily for 1/20th that amount.

Xerxys

Are those numbers for real?????? Dang' I hate being illeterate!!

Willravel

I agree, but the Republicans (and their corporate overlords) would scream "socialism", as if it's some sort of bad thing to regulate the market to prevent abuse. It's in the best interest of the corporations to protect their money via the media, controlling the regular Joe's perception of how the economy works.

The CEO should be paid 100 times what the lowest compensated worker at the company makes, and the bonus should be percentage of profit growth over the last year multiplied by 10,000 (5% profit growth would mean a $50,000 bonus).

The lowest paid full time employee of my previous company made about $17,000 a year. That means $1.7m a year for the CEO. That company also saw a growth in profit by about 7% (iirc, could be wrong), so the bonus would be $70,000. That's $1.77m a year, which anyone could live on comfortably.

No one should get a $40m bonus. No one.

ASU2003

Why execs' fat perks roll on - MSN Money

I thought you were going to be bringing up this article on MSN today. Or talking about Obama saying he is going after executive compensation.

There are a lot of scams they do to. Lots of them work for $1 to get around the high income taxes, but get stock that they can cash out in a year and pay 15% on the gains, and claim the loses against the amount of initial value they were purchased for.

And stockholders aren't organized. My 401(k) owns plenty of companies, some 'good', some 'evil'. But the financial institution get to vote in stockholder meetings and they probably get some under-the-table benefits to vote with the board.

robot_parade

Yes, I've wondered much the same thing. Sure, CEOs are (well, ideally), very talented people, and something of a rare commodity. They should be paid accordingly. But executive pay seems to be growing completely out of control, especially relative to average worker pay. I think that perhaps the 'old boys network' you describe is exactly the reason. I'm honestly not sure how to solve it...government regulation seems wrong to me in this case, but 'the market' doesn't seem to be solving the problem to me very well.

lofhay

I am not sure that government intervention is the answer either. A possible starting point might be for more and more of us to speak up--in forums such as this, in letters to the editor of local newspapers, in writing to the management of any mutual funds we own---any way we can think of to bring our discontent to the attention of as many corporate executives as possible. These corporate types now know that they have most of the people fooled as to how "indispensible" they are. We need to let them know that we believe that board members are not living up to their fiduciary responsibility to look out for shareholders' interest, and this is a breach of trust, against the law.

What else can you think of?

laconic1

I don't know what the answer is either. Like robot_parade I don't know that government regulation across the board is the answer, but the market isn't quite getting it done right now. I like the idea of tying it to the companies salaries, but instead of tying it to the lowest paid employee in the company I would probably tie it to the mean or median salary of all employees, maybe 50 times the mean or median. That way a company like Walmart would have lower paid execs than a company that pays their workers better. Maybe have some independent organization set up a "best practices" guideline for executive compensation, then audit companies for compliance and allow companies to advertise their compliance with these "best practices" as a way to encourage companies to reign in executive compensation.

william

The basic answer to your question is "yes, and they deserve it". The stockholders decide who will be in top mgmt. They decide the pay/payout plan. I worked @ Sears and saw the annual reports, which included the CEO's pay. It wasn't just pay, but stock options that made the money. K-Mart bought Sears and the last CEO walked away w/plenty. The new one stepped in w/a nice package deal. The stockholders allowed it to happen. IMO - their pay should be based on service, just as the regular Joe, but on a higher level. If you continue to help the business make a profit, you get a raise; if not, we'll consider the door.
One thing I've thought as funny is hearing the banks,et al. say "they have to keep the people w/experience & pay the bonuses". WTF - you drove the bank into the ground, and I should keep you?

Jozrael

I entirely disagree. The stockholders don't get to decide how much to pay the CEOs.

Cynthetiq

Compensation for executives on publicly traded companies is published each and every year in the 10K. It's up to the INVESTOR to read and understand the 10K to KNOW what the company has been doing for the past year and where they PLAN on going for the future.

Companies have bylaws that they can enact and follow as they see fit. Just like they can manufacture and market as they see fit.

Investors can and will invest in companies they see making money and profits and increased shareholder value.

If you don't think that a CEO should be compensated for their work, don't invest in their companies. It's pretty simple.

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lofhay

I wish it were that simple. Most investors don't think about how directors of corporations are betraying their fiduciary responsibility by overcompensating their officers. The fact remains that, if stockholders would be better off if the officers were paid more reasonably, then the directors owe it to the stockholders to see that this is done. Investors feel powerless. Maybe more publicity, such as this forum, will help shed some light.

Cynthetiq

Investors? or you mean 401k holders? I don't see them being the SAME kind of investor. Just like preferred stockholders and class b stockholders, it doesn't give the same results or abilities. Mutual fund holders don't take the same risk as actual stock holders.

What a generalized statement of betrayal. For the thousands of companies that have responsible boards of directors you're going to point to the FEW that had CRAPPY boards and crappy executives and make the case that it should all change?

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