Big Payoffs for Big Bosses: Yay or Nay?
(Please see below for my editorial on this article)
Pay Up - Overpaid bosses are back
SINCE the financial crisis American bosses have made sacrifices. The average pay for the chief executive of a public company fell from $15.1m in 2007 to $13.5m in 2008. It fell again in 2009, to $10.1m. But the days of eating at Taco Bell and wearing second-hand clothes are over. According to GovernanceMetrics International (GMI), a research firm, bosses’ pay rose sharply in 2010. The average among firms that have already reported was nearly $12m.
The top earners so far are Bob Iger of Walt Disney, with total compensation of $54.9m, followed by George Paz of Express Scripts, a pharmacy-benefits management firm, and Lew Frankfort of Coach, a bagmaker. Ray Irani of Occidental Petroleum, who usually does well on these lists, placed a disappointing fourth with a paltry $47.1m. The highest earners benefited from a resurgence of cash bonuses, which had previously declined; $29.3m of Mr Irani’s pay was in cash. The trend towards paying bosses in restricted stock (eg, shares that cannot be sold for several years) continued, and probably helped to align bosses’ interests with shareholders’.
But share options continued to raise eyebrows. Some 34% of bosses exercised them in 2010, up from 23% in 2009. Frits van Paasschen of Starwood Hotels and Resorts Worldwide cashed in a bundle he was given when the firm’s shares were in a ditch in February 2009, pushing his total pay up from $2.9m in 2009 to $17.4m in 2010. He was granted roughly 1m shares at an exercise price of $11.39. By the end of 2010 they were worth $60. “There are plenty more egregious examples to come,” says Paul Hodgson of GMI.
Shareholders have been taking advantage of new “say on pay” rules to growl their displeasure. They have voted to reject executive pay deals at 35 firms, including Hewlett-Packard, a big IT firm, and Beazer Homes, a building firm that subsequently dumped its boss. This may be more “no” votes in a single year than have been cast in the rest of the world since Britain first introduced “say on pay” in 2002. Unhappiness over pay extends far beyond the activist shareholders and union pension funds that bosses like to blame.
Shareholders at most American firms have also been offered a chance to vote this year on how often they would like a say on pay. Most boards recommended a vote once every three years (the minimum allowed under the Dodd-Frank act, a financial reform adopted in 2010). But in almost all firms without a controlling shareholder, most votes were cast for having a say on pay every year.
This has not stopped bosses from lobbying for weaker rules. One Dodd-Frank rule requires firms to publish the ratio of the boss’s pay to that of the median worker. Congress is under pressure to scrap this rule, which was passed when the Democrats were in charge. The Securities and Exchange Commission (SEC), which must draft the small print, has been swamped with objections. Some firms say the rule would be absurdly costly to obey, especially if it includes workers abroad, part-timers or contractors. They may have a point, though there is speculation that the SEC will apply it only to employees in America.
Bosses’ chief worry may be that publishing such numbers will make them even more unpopular than they are. The ratio of top to median pay may, as bosses insist, be irrelevant to sound management. If so, shareholders will no doubt ignore it. John Pierpont Morgan, a robber baron, reportedly believed that a boss should earn no more than 20 times the wage of his lowliest (not median) underling. Today the ratio is often 20 times that.
Jun 16th 2011
I have been head of Capital Corp for more than 28 years now, and obviously never made "Millions" as President and CEO, but some others in other companies have, and my reaction has always been the same : good for them!
Most of those "Bosses" are heads of public companies and have been making money for Investors and Shareholders who are returning the favor in attributing "Fat" compensations for the one (i.e. bosses/CEOs) who made them money - sometimes lots of money - hence my question: Why an article about those bosses making too much money?
It is suggested in the article that those CEOs' pay should be limited at 20 times the wage of the lowliest underling of the company; does that mean that once they have reached their figures for the year they should stop producing profits?
What's the deal here? What do we want from those bosses? What do we expect from them if not to be the best? Yet we don't want to pay them as the best but simply as a Super Joe The Plumber?!
What a concept: you hire the best of the best to run a Mega Company, the CEO works countless hours, deals with unimaginable problems on a daily basis, has to put up with a Board requesting more and more growth and profits, yet when it comes time to reward him for it, we don't serve him a seven course diner, we serve him a double burger with extra cheese on it.
I don't know about you, but if you had the opportunity to run a company the magnitude of Disney World, would you do it for a double burger with extra cheese?
Food for thought…
Gilles Herard, Jr. http://www.gillesherard.com