Fixing the CEO Pay Problem

I’m generally a pretty free-market kind of guy. But, when it comes to CEO pay, there is no doubt in my mind that America is screwed up and that the free market is failing us. This isn’t the biggest of our problems, but it raises unnecessary doubt about “corporate greed” and about the livelihood of the American Dream.

If you don’t believe me, check out some of the compensation paid to CEOs of companies that are losing massive amounts of money:

  • Aubrey McClendon, Chesapeake Energy, paid $18.6M while the company lost $5.8B.
  • Carol Bartz, Yahoo, paid $39.0M in the same year she’s fired.
  • Timothy Armour, Janus Capital, paid $11.4M while the company lost $757.1M.
  • Rupert Murdoch, News Corp, paid $18.0M while the company lost $3.4B.
  • Robert Stevens, Lockheed Martin, paid $21.7M while the company lost $3.0B.
  • Daniel Hesse, Sprint, paid $10.3M while the company lost $2.4B.
  • Gregory Brown/Sanjay Jha, Motorola, paid $11.7M while the company lost $111M.
  • Ronald Hovsepian, Novell, paid $5.2M while the company lost $214.6M.
  • William Klesse, Valero, paid $11.3M while the company lost $353M.
  • Klaus Kleinfeld, Alcoa, paid $14.3M while the company lost $985M.
  • Ahmad Chatila, MEMC Electronic Materials, paid $16.7M while the company lost -$68.3M.
  • The list goes on and on…

Still not convinced? Why do CEOs get golden parachutes? Why did Leo Apotheker get paid $25M after getting fired 11mos into the job? Do you get one? It makes no sense to ever have a guaranteed payout even if you screw up.

Mark Cuban once again puts this in perspective by demonstrating that the risk-reward for CEOs is out of whack.

Fortunately, it is easy to fix.

The free market should remain free. If a company wants to pay a CEO $50M in advance, they are free to do so. But the Board of Directors, whose sole responsibility is to the shareholders best interests, needs to be able to prove that such a plan is good for the shareholders. If not, the Directors need to be held personally liable.

I’d like to see the SEC adopt new rules about executive pay – including any form of guaranteed pay, pay for non-performance, pay while the company is losing money, or pay for early termination. These rules should outline a very strict and narrow definition for when such compensation would be “good for shareholders”. Common sense should win out here, and the right answer is “almost never”. We all know that if an employee isn’t working out you should fire them with impunity. CEO’s are no exception.

As for the CEOs that are already beneficiaries of guaranteed payouts – if they have any character at all, they should forfeit these benefits and ask their Board of Directors to rework their compensation to something in line with what the rest of the company gets.

4 thoughts on “Fixing the CEO Pay Problem

  • November 22, 2011 at 8:25 pm
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    I wonder if you would get more feedback and commentary on Google+

    Reply
  • November 23, 2011 at 2:43 pm
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    typical reason I heard on enormous CEO compensation is international competition. If we don’t offer these kind of package, we will lose top talents to foreign competitors. While I know this is true on a number of cases, I feel it’s overused to defend the obscene salary.

    Reply
  • November 23, 2011 at 3:25 pm
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    @jsi106. Again, I’m not opposed to high compensation. I am opposed to high compensation for shitty performance. The 12 examples above are examples of shitty performance. Who needs “top talent” that loses hundreds of millions of dollars?

    I also simply reject the notion that this is “competitive pay”. These guys are not about to leave the US, they have families and roots here, and generally love living here. Why would any CEO with confidence in their own ability need a promise to get $30M if they get fired?

    I’m not asking to change salaries. I’m just asking for the SEC to start enforcing that CEO contracts be in the best interest of the shareholders. Technically, the SEC is already supposed to do this.

    Of course, the SEC couldn’t even figure out Bernie Maddoff, even after 10 years and multiple filed complaints that spelled it all out…. Perhaps wishful thinking from me…

    Reply
  • December 1, 2011 at 11:06 pm
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    I don’t think that was the goal of SEC when it was formulated back in the 1930’s, to enforce CEO or executives contract in the best interest of the shareholder (Nothing is wrong with that goal, but the devil is in the detail and implementation, and I don’t know any government agency can fix real problem).

    I think it’s funny out of all the billionaires in the US, Mark Cuban came out and pointed risk-reward on CEO salary. Until just the past year, he has been doing exactly the same with his NBA Mavericks team. Giving out ridiculous contract to mediocre players who shown little value to the team, granted his method actually worked the past year, while it did not for New Yorks Knicks. But there are many other area of society where risk-reward is out of wack (i.e. sports, hollywood, some may say this is true in technology), should we also tackle those industries and bring justice to the shareholder?

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