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Runaway Pay

Here’s a question that’s a surefire conversation starter at this year’s holiday party: How much should top executives be paid? Or to put it another way, when is enough, enough?

December 15, 2006
Related Topics: Compensation Design and Communication
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Here’s a question that’s a surefire conversation starter at this year’s holiday party: How much should top executives be paid? Or to put it another way, when is enough, enough?

    It’s a hot topic anytime, but particularly relevant this year given the recent revelations over backdated stock options, lucrative golden parachutes and all manner of perks and goodies that many executives insist on packing into their compensation packages.

    Not surprisingly, two of our five top Workforce Management Newsmakers of the Year for 2006 are people who were deeply involved in the executive compensation/corporate governance debate these past 12 months: professors Erik Lie and Randall Heron, who first exposed the options backdating scandal, and SEC Chairman Chris Cox, who has been pushing for more transparency and stronger rules for executive compensation.

    But there is another view from the executive suite, and it was articulated a few weeks ago by media mogul Barry Diller, who was ranked as the highest-paid CEO last year by the Corporate Library, a corporate governance research group. It pegged Diller’s 2005 compensation at $295 million, with most of that coming from stock options.

    Diller says that "the whole issue of executive compensation, and particularly the policy of The New York Times business section toward executive compensation ... [is] absolutely loony." And as for corporate governance, he told a media summit that the issue is "completely misunderstood, especially by the birdbrains that write about it. ... Their reactions to everything are so dim, and I am talking about the Corporate Library and I’m talking about these people that analyze these things and don’t have a clue."

    It’s not surprising that the guy singled out as an example of excess in executive compensation should be testy about those doing the singling out, but it raises another more basic question: Does this really matter?

    Well, it matters for two reasons—proportion and perception.

    Executive pay only becomes a hot button when it seems out of proportion to the success of the company and everyone else who works there. For example, Michael Eisner’s compensation was rarely questioned during his first 10 years at Disney because the company was growing and successful. It only became an issue during the last half of his tenure, when the stock price stagnated and he became more imperious, domineering and arbitrary.

    In other words, people will accept big paydays for top executives as long as they track along with the overall success of the company.

    Perception hits a different nerve. It’s about the widely held notion that no matter what happens, the CEO always gets a big payday. While the workforce deals with layoffs, buyouts and the sense that anyone can lose their job at any time for any arbitrary reason, the folks in the executive suite get golden parachutes when they fail.

    Take Bruce Karatz, the chief executive of KB Home who was bounced after an investigation found he had picked stock option dates that inflated the value of stock grants he had received. His punishment? He leaves with $175 million in stock options, severance and pension benefits.

    And for a while, it looked as though UnitedHealth Group CEO William McGuire was going to walk away with a $5 million-per-year pension and more than $1 billion in stock options after being pushed out for manipulating the pricing of those options. But now a federal judge has temporarily barred him from tapping that money until a UnitedHealth committee can determine whether the company has any claim against him. McGuire supports the freeze, since he thinks the internal investigation will vindicate him.

    Diller may be right that the people who look at executive compensation and corporate governance are wrong about him, but they’re on the money about the issue in general. John Challenger, a management consultant who studies these things, says that 54 executives have left their jobs this year over the backdating of stock options, including 17 CEOs, 11 CFOs and eight general counsels.

    "Employee salary increases have barely covered cost-of-living adjustments, while CEO pay has skyrocketed," he says. "To have the highest-paid executives attempt to get even more money by backdating stock options is undoubtedly and understandably being viewed with considerable ire among rank-and-file employees. The result could be lower productivity, decreased morale, higher turnover and an inability to recruit top talent."

    These are sobering thoughts to end the year, because the debate over executive compensation and corporate governance has just begun.

Workforce Management, December 11, 2006, p. 74 -- Subscribe Now!

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