Yesterday, I discussed the debate over whether John Thain of Merrill Lynch should have received a bonus of $10 million, something that, apparently, he initially recommended as appropriate to his board. Then, in the wake of public outrage, he withdrew that request, something that has been spun as something noble.
There are two camps: those who feel that he did the best he could under difficult conditions; and those who feel that an executive can't claim a bonus when conditions are great, riding the tide, then claim another when conditions are lousy, saying it would have been worse without them. I have to go along with the second group, and I argued yesterday that even asking for such a reward demonstrates a tin ear to prevailing sentiment, which is a talent that any public-company CEO should possess if minimally competent.
But there is another reason that giving such a bonus would be wrong, and I outline it in this way:
2) As I said many months ago in my review of Robert Reich's book Supercapitalism, a book that I thought excellent, one major flaw was Reich's point that CEOs are not overpaid. He cited a study that found that the head of ExxonMobil had commanded only 4% of the value he added to the company, and that "seems economically reasonable."
I was critical of that notion back in February, and I've had the chance to develop my objection further since then. I think that reasoning falls down in two respects: universality and symmetry.
Universality would argue that, if you're going to compensate a CEO for his/her value added, you must do that for everyone in the company. The scientist who comes up with 20 patents is often given a bonus, maybe a different title, perhaps a private office - but no part of the increased revenue stream. The secretary who develops a new document flow procedure is, again, generally not given a piece of the cost savings. If it's "reasonable" to give the CEO some percentage of that value, value which may well be based on things beyond the control of that office (such as built-up brand value), and I'm not sure I think that 1/25th is a proper amount, then it is equally so to reward other valuable employees in the same way.
The concept of symmetry would call for CEOs to share the downs just as they do the ups. If the stock price falls 75% during a CEO's tenure, he/she gives back a substantial amount of money (the company could grant a limited salary for the effort, then take back it and more for the results). The corporation could make some adjustments for market performance as a whole, but there would be none of this, send the stock price down, pass GO, collect 210 million dollars.
This all seems pretty basic to me, that these two principles would be part of any rational variable compensation system, but we certainly don't see them used, and we don't even hear them discussed. Instead, we preserve the concept that CEOs are somehow different from other employees, above them, not subject to the same rules. Perhaps a look at what is going on right now will change that attitude.
There are two camps: those who feel that he did the best he could under difficult conditions; and those who feel that an executive can't claim a bonus when conditions are great, riding the tide, then claim another when conditions are lousy, saying it would have been worse without them. I have to go along with the second group, and I argued yesterday that even asking for such a reward demonstrates a tin ear to prevailing sentiment, which is a talent that any public-company CEO should possess if minimally competent.
But there is another reason that giving such a bonus would be wrong, and I outline it in this way:
2) As I said many months ago in my review of Robert Reich's book Supercapitalism, a book that I thought excellent, one major flaw was Reich's point that CEOs are not overpaid. He cited a study that found that the head of ExxonMobil had commanded only 4% of the value he added to the company, and that "seems economically reasonable."
I was critical of that notion back in February, and I've had the chance to develop my objection further since then. I think that reasoning falls down in two respects: universality and symmetry.
Universality would argue that, if you're going to compensate a CEO for his/her value added, you must do that for everyone in the company. The scientist who comes up with 20 patents is often given a bonus, maybe a different title, perhaps a private office - but no part of the increased revenue stream. The secretary who develops a new document flow procedure is, again, generally not given a piece of the cost savings. If it's "reasonable" to give the CEO some percentage of that value, value which may well be based on things beyond the control of that office (such as built-up brand value), and I'm not sure I think that 1/25th is a proper amount, then it is equally so to reward other valuable employees in the same way.
The concept of symmetry would call for CEOs to share the downs just as they do the ups. If the stock price falls 75% during a CEO's tenure, he/she gives back a substantial amount of money (the company could grant a limited salary for the effort, then take back it and more for the results). The corporation could make some adjustments for market performance as a whole, but there would be none of this, send the stock price down, pass GO, collect 210 million dollars.
This all seems pretty basic to me, that these two principles would be part of any rational variable compensation system, but we certainly don't see them used, and we don't even hear them discussed. Instead, we preserve the concept that CEOs are somehow different from other employees, above them, not subject to the same rules. Perhaps a look at what is going on right now will change that attitude.
1 comment:
Androcass: I agree that CEO pay is often outrageous, especially for struggling companies. Nevertheless, care needs to be taken when linking CEO pay with the stock price. Otherwise, you have a situation where the CEO has a huge incentive to manipulate the stock price. This is what led to the disasters at Enron, Global Crossing, MCI/Worldcom et al. I have little confidence that Sarbanes-Oxley will help, either.
Furthermore, how many times does stock price really reflect the market and not the individual company? A CEO shouldn't be rewarded just for being CEO in a bull market.
Other metrics would be better - profitability, market share, customer satisfaction. Unfortunately, many of those metrics are much harder to track, especially for the board of directors.
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