See that guy up there…besides being stunningly handsome, he is also Lee Raymond, former CEO of Exxon who was criticized for getting stunning amounts of pay for doing his job while the country’s gas prices skyrocketed. My man Gregg Easterbrook, (the Tuesday Morning Quarterback) tackles CEO pay in this way:
Much news and sports commentary focuses on the ever-larger paychecks of professional athletes. But even Peyton Manning is a day laborer compared to the modern Fortune 500 CEO. In May, Exxon Mobil shareholders passed the first resolution in company history to be enacted over opposition of the board of directors; at issue was shareholder fury regarding the $168 million retiring CEO Lee Raymond awarded himself in his final year. “There’s some unhappiness about the way Raymond’s compensation was handled,” new Exxon Mobil CEO Rex Tillerson dryly told a news conference. During the summer Hank McKinnell was ousted as CEO of Pfizer. Over his last five years at the helm, he got $162 million, even as Pfizer earnings faltered. Carol Hymowitz of the Wall Street Journal reported that the head of Pfizer’s “compensation committee” defended McKinnell’s windfall on grounds of market forces in executive pay — which in this context appears to mean, “CEOs at other companies are picking shareholders’ pockets, too.” There just wasn’t anybody who would have taken the Pfizer job for less than $162 million? McKinnell’s pay for his tenure atop Pfizer equates to $130,000 per work day.
Mr. Skinner doesn’t go too crazy with his own pay — but $3.4 mil ain’t bad.Not all Fortune 500 CEOs are glorified pickpockets. For instance, James Skinner, the CEO of McDonald’s, paid himself $3.4 million in 2005, as McDonald’s income was rising. (All pay figures in this item fold together salary, bonus, stock options and stock grants.) A year’s pay of $3.4 million is a lot, but a CEO who makes good strategic decisions for a large firm easily could be worth that amount to shareholders. Contrast to Home Depot CEO Robert Nardelli, who is under pressure to resign owing to what the Louisville Courier-Journal earlier this month called “a firestorm over his pay and the Atlanta company’s lagging stock price.” During the past five years Nardelli has earned from the company $245 million — $196,000 per work day — though Home Depot’s stock price has stagnated. Whether it’s fair to judge a CEO by stock price is an open question. Economic theory says stock prices represent the market’s guess about a corporation’s future value: that is, what future buyers will be willing to pay for the shares. CEOs have no control over what investors guess regarding their company’s future, while pressuring them to prop up stock using short-term gimmicks leads to accounting scandals. Corporate executives are more fairly judged by sales and profits than by stock prices, and in the case of Home Depot, those numbers are strong; that the stock price is stagnate reflects the market’s guess about the company’s future, namely that it is unlikely to expand much more. But sympathizing with the pressure Nardelli is under is no justification for him being wildly overpaid, at shareholder and worker expense. And please don’t tell me the prevailing prices for executives justified Nardelli’s huge number, because this requires you to argue that there was not one single qualified manager willing to run Home Depot for less than $245 million. “You’re only offering $244 million? Forget it!”
Bad enough is the matter of executives insisting what they receive be called “compensation.” Workers get wages, white-collar employees get salaries and executives get “compensation,” as if they were lofty philantrophists. Keep in mind Orwell’s maxim that we cannot think clearly about things unless we call them what they are. By insisting their pay be referred to using a silly euphemism, executives make it harder to think clearly about their excesses. The media go along with this exercise in weasel-wording. Fannie Mae CEO Franklin Raines paid himself $64 million from 2001 to 2003, about $85,000 per work day, during a period Fannie Mae was engaged in “fraudulent accounting,” according to a recent report of the Office of Federal Housing Enterprise Oversight. Raines, the report said, manipulated Fannie Mae earnings so the numbers would trigger his maximum bonus milestones. Yet even when reporting on the federal document accusing Raines of fraud, news organization called the $64 million Raines’ “compensation,” as if for a noble deed.
Next, consider that executive income usually is rubber-stamped by boards of directors whose members may be engaged in self-dealings with the firm, or who have a self-interest in rising CEO pay. As Julie Creswell noted in the New York Times, “Five of the six active Home Depot board members are current or former chief executives of public corporations … CEOs benefit from one another’s pay increases, because compensation packages are often based on surveys detailing what their peers are making.”
Suppose I was placed on a committee that would vote on Peter King’s salary. Suppose King would be paid with someone else’s money; that there would be no penalty to me no matter how much I voted to lavish on him; and that my next ESPN contract offer would be based on a survey of what football columnists, including King, are earning. I’d vote King a huge increase — maybe to $196,000 a day! This is the situation boards of directors are in when they award wheelbarrows full of shareholders’ cash to CEOs. The board members know the more they inflate CEO pay, the more they themselves will be able to pilfer from their own shareholders. In June, a New York state judge ruled a shareholders’ lawsuit against Viacom could proceed. The suit alleges the board of directors breeched their fiduciary duty to shareholders by paying Viacom’s top three executives $160 million in 2004, or about $213,000 per work day per executive. In 2004, Viacom lost a gasp-inducing $18 billion. From the directors’ standpoint, inflating the checks of the top managers had little downside. In most circumstances, company-paid liability policies effectively render directors immune from any legal consequences of their decisions, while overpaying executives adds to the arguments board members use to demand additional millions from their own corporations.
Recently the Business Roundtable released a study purporting to show that CEO pay rose 9.6 percent annually from 1995-2005, while stockholder returns rose 9.9 percent in the same period. So things aren’t so bad, eh? The Business Roundtable said the study “sets the record straight.” The Business Roundtable is, by its own description, “an association of chief executive officers of leading U.S. companies.” As Gretchen Morgenson, dean of Wall Street journalists, laid it out in the New York Times, the study systematically understated the income of CEOs in two ways. First, the numbers exclude dividends received by CEOs on restricted stock holdings, and this is often a big chunk of executive income. Second, Morgenson wrote, “The study counts only the value of the options and restricted stock received by executives on the dates the awards were made.”
That renders the study about as truthful as an Enron balance sheet. Suppose I award you an option for a share of Tuesday Morning Quarterback Enterprises, on a day the stock is selling for $10. Naturally the value of my company skyrockets — based on hat and T-shirt sales, perhaps. The stock price hits $50, you exercise the option, sell the share at $50 and realize a $40 gain. According to the Business Roundtable you made $10. Include the value of gains on stock options and restricted grants, Morgenson found, and CEO pay increased far faster than shareholder returns in the last decade. Now guess who the chairman of the Business Roundtable was when the “sets the record straight” study was being prepared: Hank McKinnell of Pfizer. How does it serve the interests of CEOs for their trade association to be blatantly dishonest toward the public about CEO pay? Unless the Business Roundtable is saying that CEOs as a group wish to deceive the public
Just some food for thought, on this wonderful Friday. Go ahead and read the whole Gregg Easterbrook column on the NFL. It is the most intelligent weekly sports column in this great country of ours….