2/07/2007

With investors increasingly unhappy over CEO pay and increased news coverage and public outcry what will the solution be? Too many Board of Directors still have the 'good ole' boy system. However, stockholders are now making their voices heard with the upset over CEO Robert Nardelli at Home Depot, who received more than $120 million after a drop in stock performance, as quoted in Business Week (http://www.businessweek.com/mediacenter/podcasts/cover_stories/covercast_01_04_07.htm?chan=search )Bob Nardelli's departure from Home Depot came down to a squabble over pay for performance and yet they pay him to leave. AT&T gave a $26 million severance package to a CEO that only lasted 9 months. When stocks go up, then CEO's have earned their pay and their pay may go up with limited interference from employees, investors and the public at large. However, when stocks go down, why are CEO’s leaving companies with multimillion dollar severance packages?

8 comments:

Kate said...

Risk is one word that comes to mind when I think of a CEO's position. When a CEO has helped one company succeed in the past, this does not mean that the skills they have will ensure success of another company in the future. There are many factors that are involved in the success of the company other then the CEO. A CEO’s position in varying industries, the general economy, the company’s info structure, the company’s supplier, unions and many other things affect the range of success that a CEO can have. To get a CEO to agree to take a job there has to be some way to get around the risk of failure that most inevitably will happen and that the CEO will be blamed for.

When hiring their CEOs, I'm sure that Home Depot and AT&T wanted the best. To get the best they were willing to negotiate what each party thought was fair. The CEO abilities seemed worth paying for. Excuse the phrase, but hind-site is always twenty-twenty.

Jackson said...
This comment has been removed by the author.
Jackson said...

I agree with Kate that a CEO deserves compinsation for filling the role of corporate posterchild slash whipping-boy. I do support the high pay for CEOs, but not the asinine pay that we see Nardelli, Eisner, and others receiving.
Outragous golden parachutes signed into contracts creates major problems from the get go. It's no differnt than the sports athlete who signs a multi-year multi-million dollar contract with a sports club. Once thay have signed the contract, their incentive to play well has dropped...whether productive or unproductive, they are now filthy rich.
Lowering executive compensation and salaries will not only allow more money be put back into the company, I feel that it also keeps the incentive for executives to be productive alive.

joseph said...

I wonder if the assumption that once CEOs sign a contract that makes them filthy rich, no matter what, they loose the incentive to do their best holds? I would say the golden parachute compensates them for the risk they take with respect to future income. From their perspective they can seriously suffer from a damaged image if the company they manage performs poorly. Most of the CEOs are already filthy rich and probably the recognition they might get from a corporate turnaround also is a big motivator. Trying to create a corporate turnaround can make or break a career. In my opinion the amount of money these individuals make in case of poor company performance is irrelevant. It is merely a functioning of the market that determines the price. If the negative costs coming from for example decreased worker productivity or losses in investor support prove to start playing a larger role, this information will eventually be reflected in the compensation (price) of CEOs.

mason said...

It would be difficult to fill the shoes of a CEO in a top competitive company. Some people are very successful at it, and for others it takes time to find a niche. They just may have a hard time fitting in at the company. CEOs are the head of the table so, when something goes wrong they are the first to take the heat. I admire many of those who admit their mistakes because we all make them and will continually do so.
I think Kate is right about the negotiation of pay. Home Depot Hired Nardelli in hopes to make a change. They must have thought he was worth what he got. When he didn't live up to their expectations, he left. Now some one else will fill his shoes.
We complain why these CEOs get such a high severance package when they have a poor performance, but why do these companies offer them?

TR said...

I too support the pay we are currently giving to CEOs. I think that the market will work itself out. If more and more CEOs don’t perform, than the average pay will go down. If we continue to see growth in the economy we will continue to see CEO pay go up. They are to image of a company, and if the company does well, their pay will increase. Like the others said, if the company perceives that the CEO is worth that much money it is ok. I think that CEO pay will go down over time relative to the pay of everyone else.

Dr. Tufte said...

-1 on Jackson, Mason, and TR for spelling and grammatical errors.

I'm letting Jada slide on the title, due to technical difficulties.

If the board is there, in part, to determine CEO salaries, who are we to question their decisions? We don't have their information set. More to the point, shouldn't we be asking if they are dissatisfied with the pay they controlled?

Any decent textbook can give you a lot of reasons for high CEO pay. But, in this case, I think we need to think of our psychology. Take the case of Nardelli.

He had a contract. It was vetted by the board. It wasn't public.

Now, he and Home Depot have honored the contract. Yet, someone is blabbing details about it. Who would have incentive to do that? More than likely someone who believes 1) that people will hound him about something that should have been kept secret, and 2) someone who thinks he needs to be hounded. For my part, I get uncomfortable when I'm manipulated like that.

Jordan said...

Dr. Tufte said:

"If the board is there, in part, to determine CEO salaries, who are we to question their decisions? We don't have their information set. More to the point, shouldn't we be asking if they are dissatisfied with the pay they controlled?"

From what I understand, some CEOs and board members sit on each others' boards. If that is the case, then I can see a potential problem where there might be a camaraderie attitude: "You scratch my back and I'll scratch yours." It may be that some CEOs are indeed overpaid due to friends in high places.