Chairmen of the Boards

By Carlos Portocarrero

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[This is a guest post from Brip Blap—please make sure to check out his site. He has a very unique perspective on a lot of the topics that we PF writers tend to cover. I think I found him thanks to this fantastic post, but I can’t be sure]

Angelo Mozilo: The face of excess
Angelo Mozilo: The face of excess

A couple of days ago The Writer wrote a piece called In Defense of CEO Packages. Over the last few years, we’ve certainly seen quite a few examples of outrageous pay (name, company, 2007 comp and what they did, from Forbes:

  • Richard Fuld, Lehman Brothers: $71.90 million, guided Lehman into bankruptcy
  • Angelo R. Mozilo, Countrywide Financial: $102.84 million, helped kick-start the current real-estate crisis with horrible subprime lending practices and saw company collapse into a firesale to Bank of America
  • Michael W. Perry, IndyMac Bancorp: $1.11 million, a relatively tiny salary until you consider that his leadership resulted in his bank being seized by the FDIC

The list could go on and on and even include CEOs like John Mack of Morgan Stanley and Jeffrey Immelt of GE who haven’t killed their companies (yet) but have overseen huge drops in the value of the company’s stock. A series of CEOs, stretching back to Ken Lay of Enron, have destroyed value in the market right and left seemingly without punishment.

The Writer’s argument is that you need to pay out those types of salaries to attract talent, either real (somebody with clout in the industry, a history of success) or perceived (failed BIG at Goldman Sachs, but hey, he was at Gooooldman!). I’d go a step further and say that the argument against CEO pay cannot be made without making an argument against capitalism and the whole employer-employee setup we have in this country.

Full disclosure: I am a part owner of two Fortune 500 companies due to having positions in two individual stocks and a very small part owner of all of the S&P 500 due to owning a few index funds. The two individual stocks I own have done very, very poorly in the current market although they are surviving—which makes them better than the worst of the worst like Lehman, I guess. However, as a part owner of these companies I’m expressing my confidence in the CEOs there. I haven’t sold my ownership share and invested in another company. Those CEOs are my employees and although my fellow shareholders haven’t banded together to fire them, in principle we could.

When I go look for a new job, I look for a lot of things, but let’s face it—salary is a biggie. These CEOs are no different. I can also guarantee you that if a company offers me a salary of $100,000, I’m going to collect that $100K whether I spend all day working at manic speed or surfing the web pointlessly. I may not stay there for a long time or get a raise if I spend all day reading about the Jets, but I think most people who work in corporate America realize that there’s a lot of room for dogging it. These CEOs know the same thing. Their salaries are granted in advance and the boards who grant them are paying the market rate for that position.

I’m not sure that most of the middle managers I know who complain about CEO salaries would welcome government-mandated controls over middle-management salaries. As long as investors don’t revolt by selling shares or voting with their proxies against appointments to the board, investors shouldn’t complain. I think it’s time for investors and employers who hate seeing CEOs get overpaid to start thinking about the little guys’ roles in supporting them. If you own a company’s stock and don’t like how the CEO’s getting paid—if you think it’s affecting the companies’ bottom line—you have to complain in the only way they’ll understand: sell. If you don’t like how your employer pays the CEO—a guy who’s getting rich off the hard work of the company’s employees—get a new job. But don’t sit around groaning about the need for the government to intervene… in a few years they may start intervening in your salary, too.

[Brip makes a great point about stockholders and board members—they are the ones in charge of approving these salaries and since, as he pointed out in a comment on the original story, CEOs make up the boards—they have no problem green lighting these incredible compensation packages]

7 Responses to “Chairmen of the Boards”

  • Lazy Man and Money Says:

    So what about mutual funds? I can’t own mutual funds or index funds because many of them will have highly paid CEOs? Something doesn’t seem right there.

  • Steve Says:

    @Lazy Man: No, of course you can own mutual funds or index funds – just be aware that you’re buying into a bunch of really poorly run companies when you buy “the whole market” with an index fund, for example. Enron was owned by a lot of funds – as were Lehman, AIG, etc., etc….

  • Four Pillars Says:

    Great post! I think CEO compensation is nuts – if they weren’t making $50 million per year as CEO they would be cutting grass for a living. :)

    However – I agree – gov’t regulation is dumb. It shouldn’t be any more necessary than regulating that you can’t lend money to people who can’t afford to pay it back.


  • Hunter Nuttall Says:

    This reminds me of athletes. In particular, it reminds me of two people at a football game that they had bought tickets for, complaining that athletes are overpaid. Well, they could have let their voice be heard by not buying tickets!

  • GrendelVS Says:

    Two things: Salary vs Compensation
    1. I think it’s fine that salaries are used to lure people to a position – I *DON’T* think that any person should be making 50-100 times what the lowest rank at a company is capable of making as a “guaranteed payout”. Example: If the lowest salary RANGE at my company tops out at $40k and the CEO makes 50x that ($2M), that is excessive. What seems true at most companies is that there is a structure to the salaries offered at lower levels until you get to the VP level (sometimes one or two levels lower). At that point, the salary becomes lost in a cloud of “what can I get away with?”. I would be really impressed by a company that structured salaries all the way to the top so that everyone knew what the next level up is capable of being paid.

    2. “Compensation” is usually the more egregious issue. We have been seeing some of this with the current bailout – companies that are accepting public money paid out their executive bonuses BEFORE asking for the money. So the executives were REWARDED for driving their company into the ground. “Golden parachute” indeed!

    I work for a Fortune 50 company. **MY** bonus is dependent not just on my performance but the performance of my division of the company (THOUSANDS of people). The same is true of my boss and his boss and her boss. But then it changes so that the VP of our division gets a bonus regardless of performance – he just gets a bigger bonus if the division performs better. I previously worked for a different “Fortune 100″ company which EVERY YEAR lets go 10-15% of its staff between October and December because part of the executives bonuses depends on the relationship between **end-of-year** headcount and **fiscal year** revenue – ie, bringing in “x” million dollars of revenue with “y-15%” headcount = (z times 3) bonus.

    All that being said, I don’t ever see any executive board “shooting themselves in the wallet” just to be fair to the bottom rung of the company or the shareholders. I mention the shareholders because IF the upper management comensation was brought in line with compensation given to the lower echelons, PROFIT MARGIN should increase.

  • ClraiGixFun Says:

    I’m new here on the forum, found it by searching google. I look forward to chatting about various topics with all of you.

  • CEO pay | brip blap Says:

    […] got a guest post over at The Writer’s Coin today on CEO pay. Go check it out, and subscribe to his RSS feed to see his interesting (and often […]

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