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A Shock to the System

October 2, 2003
Related Topics: Variable Pay, Compensation Design and Communication, Featured Article, Benefits

Compensation consultant Jeffrey Christian knows a thing or two about breathtakingly enormous CEO compensation packages and the public heat that they inspire. He helped put together the nearly $70 million "golden hello" that CEO Carly Fiorina received in 2000 for her first year with Hewlett-Packard Co. So when he expresses shock at the $187.5 million compensation package bestowed on former New York Stock Exchange CEO Richard Grasso by a generous NYSE board of directors, it’s fair to assume that the issue of soaring CEO paychecks is reaching yet another milestone.

    In the case of Fiorina, Christian, chairman of Christian and Timbers, can at least point to HP’s huge revenue growth under the CEO. Even if HP’s stock continues to languish, Fiorina has certainly led the company to dramatic growth. On the other hand, Grasso headed a private company and got the big money from companies he was responsible for regulating. If his compensation package was based on performance, it wasn’t clear what standards were being used as a measure, he says.

    "I was dumbfounded," Christian says, asserting that he thinks Grasso performed his job exceedingly well. Still, he adds, "I was amazed that it could happen."

    Christian says that Grasso, who was forced to resign in September, is just the latest domino to fall in a chain that stretches back to top executives at MCI, WorldCom, Enron and Global Crossing. A common thread, he says, is what he calls "the smoke and mirrors technique of creating wealth," meaning that Lotto-sized pay-outs often develop with no rational explanation tying them to performance or other measurable criteria. He predicts that the era of lavish compensation packages and loose board standards is coming to an end. "If you try it, you will be caught," he says. "That is the message that is out there."

    Another sign of change is the triumphant march through the NYSE of state treasurers and officials of large pension funds, like the California Public Employees Retirement System, representing combined investment assets of more than $586 billion. Chief investment officers in California, New York and North Carolina demanded that Grasso be fired when the compensation package was disclosed. They are credited with forcing Grasso’s exit.

    It was only last June that Tom Wamberg, chairman and CEO of Clark Consulting, along with other executives from his company, joined Grasso to ring the NYSE’s opening bell. "If you asked four or five months ago whether he would have been forced out I would have said no," says Wamberg, who still thinks highly of Grasso. But like Christian, he believes a watershed has been reached. Finally, there was the unprecedented spectacle of the big pension funds and state treasurers conducting triumphant press conferences in New York following Grasso’s resignation.

    "They smelled blood," Wamberg says. "CalPERS and the large managers are swinging a bigger bat these days." Wamberg adds that much of the NYSE’s problem stems from the sudden, shocking disclosure of Grasso’s pay package. "What I am taking away from this, and what we are counseling our clients on, is disclosure, disclosure, disclosure."

Workforce Management, October 2003, p. 32 -- Subscribe Now!

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