06/03/2011

Who’s Responsible for Those Crazy CEO Pay Packages?


Oh, could it be the directors?

Last year, as executives responsible for corporate accounting scandals were going to trial, boards got a free pass. “We had no idea,” the directors said, and for the most part, it was plausible; the shenanigans were well hidden from board view.

Not so with this year’s eyebrow-raising, stratospheric CEO compensation. Boards approve pay packages. They presumably think about severance, sign-off on dazzling golden parachutes, and ponder the future implications of today’s option and restricted stock grants.

The issue here is quite clear: Is it right for the CEO of a public company to make hundreds of millions of dollars in compensation, even when the company’s stock is underperforming?

The American public doesn’t think so. A recent Bloomberg/Los Angeles Times poll shows that 84% of American investors with household incomes over $100,000 think CEOs make too much money.

Warren Buffett doesn’t think it’s right either. This year, in his always-stimulating letter to Berkshire Hathaway shareholders, Buffett writes, “Too often, executive compensation in the U.S. is ridiculously out of line with performance.”

Nor does John Bogle, who built the giant Vanguard family of mutual funds, think much of the trend in executive compensation. Bogle decided to stay home from the Davos economic summit this year. Why? “With all due respect, I won’t miss glad-handing most of them. They get paid as if they’re solely responsible for their firms’ success, and even if they fail, they get handsome rewards. In 2004, their compensation rose another 39% to 475 times that of the average workeru00e2u20ac”the guys and gals who get out of bed every morning and do their jobs, with never a ride on the corporate jet whose cost is paid 60% by shareholders and 40% by taxpayers. Truth be told, most CEOs I’ve met are greatly overrated.”

Ah yes, you may say, but bank directors would never overpay their top managers. Or would they? In this issue of Bank Director, Jack Milligan provides an admiring profile of Capital One and its superb CEO Richard Fairbank (total 2005 compensation, primarily option exercises: $249 million). Capital One picked up another extraordinary leader when it acquired North Fork Bancorp. and the services of CEO John Kanas (2005 compensation, largely resulting from accelerated restricted stock in the acquisition: in excess of $185 million).

At least the bank CEOs whose compensation raises eyebrows are star performersu00e2u20ac”leaders whose shareholders have had superior returns during their tenure. Many CEOs aren’t. Verizon CEO Ivan Seidenberg last year collected a pay package of $19.4 billion, while his shareholders saw their holdings decline by 26%. Similar stories abound.

With increased scrutiny of CEO compensation, boards will be called to account for decisions they make. Increasingly, it seems clear, shareholders won’t be satisfied when management takes too much of the bottom line. Nor will they be pleased when management comp plans are so designed as to encourage a sale of the company in order to accelerate options.

In either case, shareholders should reserve their outrage not for the managers whose pay plans are absurdu00e2u20ac”but for the boards who award them.

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