Tilting at Ludicrous CEO Pay

I continue to tilt at the robber barron CEO pay packages. Hopefully, at some point, the people approving these obscene pay packages can be shamed into stopping or replaced by people with some sense of decency. I was taught in the days of robber barrons the business world was seen as an amoral place (morality did not belong in this area of human endeavor) but that over time society decided that in fact morality did apply there. It is hard to reconcile that with the behavior of CEOs and board approving ludicrous pay packages. See previous post on the purpose of organizations. Half of S&P 500 CEOs Topped $8.3 Million

“It’s a complex subject and that’s really the question…Why is it so complex?” said Dominic Jones, Clarity’s president.

“Why is it that a CEO gets compensated in such a discombobulating fashion when the average worker gets a paycheck and can tell immediately what it’s about? … If you’re an investor and you get your (proxy) statement and it just goes on for pages and pages of the different methods used to pay the CEO, at some point you have to ask yourself why. ‘Why don’t I get all this?'”

Very good question. I would say they are intentionally trying and confuse the issue. Even as they spout defenses for such unjustifiably pay packages they know the pay is not defensible and so try to confuse the issue with byzantine explanations. Lets look at the CEO pay versus total earnings for several companies:

Company CEO Pay Earnings CEO %
Yahoo! Terry Semel $71,660,216 $751,000,000
XTO Energy Bob Simpson $59,489,924 $1,860,000,000
Goldman Sachs Lloyd Blankfein $54,300,000 $9,537,000,000
Occidental Petroleum Ray Irani $52,822,584 $4,182,000,000
Merrill Lynch E. Stanley O’Neal $46,375,347 $7,499,000,000
Danaher H. Lawrence Culp, Jr. $46,215,671 $1,122,000,000
Countrywide Financial Angelo Mozilo $42,994,306 $2,674,000,000
Morgan Stanley John Mack $41,400,000 $7,472,000,000
Ford Alan Mulally $39,128,100 $1,540,000
Apollo Group Todd Nelson $32,626,442 $415,000,000
AT&T Edward Whitacre $31,765,761 $7,356,000,000

Data via: Best-paid CEOS (only those with fiscal years ending after December 15th – more pay data) – for 2006 according to an Associated Press analysis that covered nearly 400 of the nation’s 500 biggest public companies and Google Finance. I realize this chart could be improved by spending more time (especially looking out over several years for both pay and earnings…) but this is what I could do relatively quickly.

Does the percentage tell the whole story? Not at all. How tough has it been to make a fortune as an energy company in 2006? But it gives you some idea of what the board is deciding is valued. As I have mentioned I personally see all of Deming’s deadly diseases as still problems today and I would add excessive executive pay to my list of deadly diseases.

Excessive Executive Pay 2005 – “As long as the pay packages were merely large, and didn’t effect the ability of a company to prosper that could continue (slicing up the benefits between the stakeholders is not an exact science). The excesses recently have become so obscene as to become unsustainable. Companies will not be able to compete if they allocate huge portions of the benefits provided by the operations of the company to the few sitting on top of the bureaucracy.”

Drucker on Executive pay: In 1977, his answer was, no. As pay did become excessive, Drucker became a prominent voice against the unjust pay of CEO’s. From the Economist: In the late 1990s he turned into one of America’s leading critics of soaring executive pay, warning that “in the next economic downturn, there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions.”

Excessive CEO Pay, 2006Obscene CEO Pay (with chart)Warren Buffett on Excessive CEO PayToyota’s CEO pay under $1 millionExposing Overpaid CEOs, 2007Compensation at Whole Foods

Update: Blackstone Chief Executive Stephen Schwarzman Made $400 Million in 2006 (private company going public). Investment banks really are a special case (the huge pay for their CEOs is largely a factor of what I see as a systemic failure in the financial system that provides too much of the reward merely to those who put together financial projections and financial deals). Obviously the marketplace disagrees and rewards these banks with unbelievably large payments. It is my belief those huge fees are out of line with reality, but they manage to get corporations to continue to pay exorbitant fees that then can be shared not only with huge payments to CEOs but huge payments to many many people working at the companies.

Blackstone’s top five executives, including Schwarzman, earned a combined $771.5 million in 2006 — part of the $2.27 billion in net income the company paid out last year. Blackstone Group expects to record significant losses for a number of years following its IPO, because of amortization and compensation costs.

I bolded the second sentence.