CEO pay - Part 1

Merrill Lynch's CEO John Thain has proven to be something of a litmus test. His request for a $10 million bonus, hastily and "admirably" withdrawn, has engendered quite a bit of commentary. James Surowiecki of the New Yorker makes the pro-bonus case:

But it’s also true that Thain probably is one of the few executives in corporate America who actually earned a bonus this year. To be sure, Merrill’s stock price is down almost seventy-five per cent from where it was when Thain took over the company, last November. But one would be hard-pressed to blame Thain for that, given the general collapse of the market and, more important, the fact that most of Merrill’s massive losses this year were the result of huge bets made long before Thain took office....[I]f preserving shareholder value is still a criterion for evaluating executive performance, there’s little doubt that Thain did a bonus-worthy job.

Matt Yglesias takes issue with that logic:

You learn in the downturn that the business community believes that the profits and losses of major firms has a lot to do with the general economic climate, and relatively little to do with the particular decisions of particular executives. You hear about things like “the general collapse of the market.” But these concepts seem to go mysteriously missing during boom times. But it can’t be both ways. Either executives should benefit when their company prospers and suffer when it doesn’t, or else variation should be sharply curtailed in either direction. The currently prevailing rule is “double-super-duper bonuses when things go up, and large bonuses when things go down.” It’s a stupid system.

Here are a couple more thoughts, though in the discussion above I have to lean toward Yglesias.

1) What are CEOs paid to do? I mean, really. Do we believe that they are experts in the business of their companies? No, of course not. (I know people who want to believe that Bill Gates can still sit down and crank out a bunch of C# code, but, I assure you, he cannot.)

There are two basic functions that a CEO needs to perform. First, there is the making of decisions, choosing among alternatives. Quite often, of course, this boils down to a decision as to which executive is more trustworthy; that is, the CEO doesn't really know whether debt or equity is more appropriate, he (or she) has to trust that the CFO knows what's right.

Second, there's the public presentation of the company to various stakeholders. Representing the interests of the corporation to internal and external groups takes up a lot of the time of the modern CEO. To do so properly requires a sense of what will most appeal to the specific audience, and there can be a lot of nuance required to convey a message. Closing a deal with a large customer is very different from puffing up the stock to a group of industry analysts.

In the second sense, Thain is a failure. If he cannot understand that the public, a public which feels it has invested in his company in some sense (through the propping up of new parent Bank of America), is likely to be opposed in a serious way to an eight-figure bonus, he demonstrates a near-sociopathic lack of ability to read that mood. And that is an important part of his job.

Think of the chutzpah it takes to recommend to the board, hey, I deserve $10 million. What kind of bubble does Thain live in? If he can so remarkably misapprehend the sense of the public in making this request, how can that board trust him to go out and speak for Merrill in other situations?

I'll have my other thought on this subject tomorrow.