MORE ON EXECUTIVE COMPENSATION

Well, it is annual report time again and the shareholders get a view of the amount of compensation received by the CEO, which in most cases is beyond anything rational. But, then the shareholders are often offered the opportunity to cast an “advisory” vote on compensation, not that it means anything.

Annual compensation in the 8 figure and occasionally 9 figure range should make shareholders demand an answer to the question What did the CEO actually do to deserve such a ridiculously high rate of pay? How much of any corporate success is really the work of a single CEO? Conversely, how much did the CEO contribute to a shortfall or failure? Whatever the corporate results, it is suspected that hundreds or even thousands of individual executives, and not just one, were responsible. In some cases corporations were or are run by creative geniuses like Steve Jobs, Bill Gates and other founders of tech companies where it is easy to see their initiation of great ideas and products. It is easy to understand why Dr. Edwin Land of Polaroid fame became wealthy based on his company and inventions. Shareholders in companies like these never doubted the contribution of the CEOs to the success of the company. Nor do shareholders who have invested in the genius of Warren Buffet ever doubt his contribution to the success of his ventures. But, what about the others? One can see how the innovators and geniuses have earned any handsome rewards provided.

No annual reports or discussions of compensation therein ever itemize exactly what the CEO has done to deserve the compensation package awarded. Shareholders need to know if the CEO is just a “cheer leader” for the management team or an innovator who comes up with new and exciting ideas. If the CEO depends on the inputs and consensus of the management team to develop strategies, products or ideas, then that CEO may just be a cheer leader and organizer but not an innovator or a force for success. Shouldn’t the shareholders be informed as to the precise contribution of the CEO and the kind of performance evaluation made by the Board in adopting the compensation package?

It is suspected that compensation packages are often developed based on an analysis provided by a compensation consulting company citing a review of the compensation packages of “peer” companies. It is suspected that, in adopting a compensation package, the Board may rely on the consulting report to justify their approval action rather than conducting any thorough independent evaluation. If these suspicions are accurate, shouldn’t Boards of Directors, and particularly the “independent” directors undertake a thorough review and analysis of the actions and contributions of the CEO in the previous year as part of setting compensation? Shouldn’t performance awards be based on something more tangible than meeting pre-set targets which, most probably do not reveal the contribution of a single person but rather reflect the results of a large team, or, maybe only the results of a vibrant economy and robust stock market. What seems clear is that Directors, theoretically acting independently, don’t seem to be taking any steps to rein in runaway compensation.

Thinking back to the financial collapse of 2008, one must ask why the highly paid CEO’s of investment banks and commercial lenders did not foresee the collapse when all of the signs should have been readily obvious. Were they all so blind that they didn’t see? That result would be hard to imagine. So, it must have been the substantial profits being generated from the activities that induced blindness. Whatever, how many of these CEOs paid any price for their complicity in the collapse? Despite failures, how many financial CEO’s from that era are still pulling down gigantic compensation packages or were moved out with a tremendous severance package? Public memories are short but that should not be the case with Boards of Directors.

Perhaps it is time that shareholders begin demanding far greater accountability and justification for the compensation awarded to executives by Boards. In being forced to accept the levels of compensation, shouldn’t shareholders be absolutely convinced that the pay is reasonable and justified by individual performance? This means that annual reports should tell the shareholders more of what they really need to know rather than just making sure all disclosures are covered.

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