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The CEO Economic Stimulus Plan

June 18, 2008

Posted by Roshawn Watson under Uncategorized

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By: Roshawn Watson

Would you want someone to say how profitable your life’s work could be?

According to the AP, median CEO pay rose in 2007 to $8.4 million, representing a gain of ~$280,000 in compensation. This is a 3.5% increase. Perhaps, this wouldn’t be so potent if the average CEO salary was not a jaw-dropping 700 times that of average employee (this NY Times picture says it all or does it?). At the top of the AP list is John Thain, who took the helm of Merrill Lynch as of 12/1/2007. Including his sign-on bonus and other inducements, he enjoys a hefty $83 million pay package for this next year. Note that Merill Lynch just suffered its worst-ever losses last year.

Although 40% of the 316 S&P; 500 companies evaluated reduced CEO pay, including many companies in finance, in many cases the pay ballooned. For example, Rick Wagoner is chief executive of General Motors Corporation. He recently announced that the company had to close four North American factories and layoff about 3500 employees. Overall, the company posted an astounding $39 billion loss in 2007 (stock price fell by 19%). Wagoner, on the other hand will receive a 64% pay raise to $15.7 million.

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Pay For Performance?
One argument is that CEO pay is reflective of how he or she performs for the company (at least this is what boards tell shareholders). Tying CEO compensation to the companies health seems great in theory, but there are several examples where this just doesn’t happen. Personally, I have no problems with rewarding extraordinary performances with extraordinary pay. If someones’ education, intelligence, ingenuity, and hard work yield superior results, and the board of directors rewards him or her… great.

However, what is becoming increasingly more troubling is that many companies only seem to follow the pay for performance plans when things are going well: CEO pay rises despite substantial losses in profits. In addition to the aforementioned General Motors example, KB Homes loss $930 million last year. Its stock loss 60% of its value. Still, the CEO received $24 million, including a $6 million cash bonus based on his performance. The board justified this saying that he exceeded certain objectives the board set. Of course, the board (including the CEO) decides how rigorous these objectives are. If someone told you that you would receive X millions of dollars to meet A, B, and C, would you make sure those objectives are met? Of course! Another example is insurer XL Capital, whose profits fell over 80% and stock price tumbled about 30%. Their CEO still got a 23% raise to $7.5 million. Without beating a dead horse, performance-based CEO pay theory does not hold water if performance wanes and pay still increases.

Public vs. Private Companies
Private companies that reward of ineffective CEOs is their own business, but with public companies, it is more troublesome. If private companies pay CEOs inappropriately high sums, the owner(s) lose. Since it is their investments (and risk) at stake, they should have the right to run their companies how they seem fit in general. In fact, the NY times illustration should be adjusted to differentiate between public and private companies (additionally it would be helpful to show the median pay differences too).

However, the bigger issue is with public companies. Their CEOs vote for pay raises for themselves while simultaneously laying off thousands of workers and raising prices on their products.

As public businesses fail due to poor decisions, antiquated business models, ineffective leadership, and external factors, shareholders lose a ton of money.

Then, some companies request government bail outs citing the societal loss if the businesses went under. Something about this seems unfair. In many cases, the CEO resigns or get fired with a golden-parachute severance package. Still, this is not an attack on wealth but rather dissent on shareholders and taxpayers paying the bill for ineffective businesses while the leadership skates by seemingly unaffected, financially. If you want the right to ridiculous profits, you should not cry foul if you make a misstep.

Forget the government economic stimulus plan, give me the CEO stimulus plan any day!

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