Tag Archives: overpaid executives

No More Executive Bonuses!

Henry Mintzberg, wrote an excellent article for the Wall Street Journal today, No More Executive Bonuses!

Don’t pay any bonuses. Nothing.

This may sound extreme. But when you look at the way the compensation game is played – and the assumptions that are made by those who want to reform it – you can come to no other conclusion. The system simply can’t be fixed. Executive bonuses – especially in the form of stock and option grants—represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy. Get rid of them and we will all be better off for it.

So, again, there is but one solution: Eliminate bonuses. Period. Pay people, including the CEO, fairly. As an executive, if you want a bonus, buy the stock, like everyone else. Bet on your company for real, personally.

All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit.

Too many large corporations today are starved for leadership – true leadership, meaning engaged leadership embedded in concerned management. And the global economy desperately needs renewed enterprise, embedded in the belief that companies are communities. Getting rid of executive bonuses, and the gambling games that accompany them, is the place to start.

It is an great article on bad pay systems that let a few top executives (and their hand picked board members) in many companies to loot the treasury of the company. I have written about this problem many times, including: CEOs Plundering Corporate CoffersExcessive Executive Pay (2005)Narcissistic Cadre of Senior ExecutivesThe Best Leadership Is Good ManagementAnother Year of CEO’s Taking Hugely Excessive PayMore on Obscene CEO PayMore on Failed Executives

There are executives that don’t act like corrupt dictators looting their country, unfortunately they are less common than those that act like looters. And they all seem to have built cultures that taking respect for people is more important that feeding a few bloated egos. Akio Toyoda’s Message Shows Real Leadership, Tony Hsieh, the Zappo’s CEOWarren BuffettHonda has Never had Layoffs and has been Profitable Every Year

The obscene pay is not just a matter of people taking a tens of millions of dollars they don’t deserve. Companies whole management systems are distorted in ways that lead the company to risk all the other stakeholders future for the potential gain of a few senior executives.

CEO’s Castles and Company Performance

Where are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance by Crocker H. Liu, Arizona State University and David Yermack, New York University – Stern School of Business

We study real estate purchases by major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor’s 500 index. When a CEO buys real estate, future company performance is inversely related to the CEO’s liquidation of company shares and options for financing the transaction. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption.

To understand better the reasons behind the underperformance of companies whose CEOs acquire very large homesteads, we read news stories about major events affecting the firms in our sample in which a CEO acquires a property with at least 10 acres or a 10,000 square foot house. These news stories suggest parallels between the CEOs’ oversight of their personal assets and management of their companies. No less than nine of the 25 CEOs attempted major corporate acquisitions in the two years following their personal acquisitions of very large real estate,9 and seven of the 25 announced significant capital investment initiatives involving the construction or expansion of corporate facilities. An additional two firms became mired in accounting scandals shortly after their CEOs purchased mansions, and one firm saw a previously agreed merger collapse.

Using a database of principal residences of company CEOs, we study whether these executives’ decisions about home ownership contain information useful for predicting the future path of their companies’ stock prices. We find that CEOs who acquire extremely large properties exhibit inferior ex post stock performance, a result consistent with large mansions and estates being proxies for CEO entrenchment. We also find that the method of financing a home’s acquisition is informative about future stock returns. A general pattern of CEO sales of their firms’ shares and options exists over the twelve months leading up to the date of home acquisition. However, when the CEO does not sell any shares, his stock performs significantly better ex post than the stocks of firms whose CEOs do liquidate equity to finance their houses. The retention of company shares simultaneous with a new home purchase, despite the presence of an evident personal liquidity need, appears to send a signal of commitment by a CEO to his company.

That we put in power CEO’s that see themselves as nobility with the right to build castles (and many of these CEO castles dwarf all but the most conspicuous castle built by nobility) by taking the wealth produced by others from corporate coffers is a sign of our failure to select acceptable leaders for companies.

Related: Another Year of CEO’s Taking Hugely Excessive PayExcessive Executive PayExposing CEO Pay ExcessesNarcissistic Cadre of Senior Executives9 Deadly Diseases

Narcissistic Cadre of Senior Executives

In yet another voice against the looting mentality of the current crop of executives Chris Bones, dean of Henley Business School writes a A crisis of confidence?

This has resulted in the creation of a narcissistic cadre of senior executives who knew no right but their own perception and brooked no criticism or check on their ambition. In their demands for personal rewards we have seen them in their true light.

Secondly, a responsible organisation should set limits above which senior reward will not stray. I cannot see a reason why any annual bonus plan should be worth more than 100% of salary or should pay out more than 50% of this in the year in question. I do not think there is any justification for the annual value of chief executives’ rewards to be more than 20 times that of the average employee. Rocketing executive pay is in no one’s interests, except the small number of executives involved, and limiting it voluntarily is a better solution than the state intervening through taxation changes.

Business schools can help rebuild confidence in business leadership. But they too have to change—to become critical friend rather than fawning supporter. MBA programmes have to produce values-driven general managers, not finance-driven technocrats. They must build critical thinkers with the ability to make decisions that benefit all stakeholders, not just themselves.

It really is a shame that the executives leading so many companies are so moral, ethically and managerially bankrupt. We need to stop allowing such people to become executives in organizations. With such fundamental problems in their basic understanding of human systems the correct solution is to stop allowing such flawed people to have power not to try and convince such flawed people to behave responsibly.

That executives believe they should act as royalty taking what they wish from the value produced by others is so fundamental a failure that I do not believe reform is the best solution. They should just be removed. If you are lucky some competitor will hire them and you can gain not only from their removal but from the damage they cause your competitor.

Related: Warren Buffett on Excessive CEO PayHonda Executives not OverpaidUnconscionable Executive PayTilting at Ludicrous CEO Pay 2008Looting: Bankruptcy for ProfitMore on Obscene CEO Pay

Another Year of CEO’s Taking Hugely Excessive Pay

I continue to do my part to publicize the abusive CEO pay packages that the current crop of unethical CEO’s, and those sitting on corporate boards have supported (Tilting at Ludicrous CEO Pay 20082007 post on CEO pay abuses). It does seem there is more anger now at the looting these corrupt CEOs have engaged in; though far too many people seem to think the corruption is some isolated few CEO’s. The widespread failure of ethical standards by an enormous number CEO’s (those taking from corporate treasuries as though it was their own personal bank account) is the problem (not a few individuals). The looters certainly have littered their “courts” with apologists for their egregious behavior. Even with the large amounts they pay such lackeys I am surprised they find such willing apologists, in such large numbers.

2007 pay
rank
Company CEO 2008 Pay 2007 Pay CEO % of 2008 Earnings total employees
1 Motorola Sanjay Jha $104,400,000 company lost $4.2 billion 64,000
2 Oracle Lawrence Ellison $84,600,000 $61,200,000 1.5% 86,600
3 Walt Disney Robert Iger $51,100,000 $27,700,000 1.2% 150,000
4 American Express Kenneth Chenault $42,800,000 $50,100,000 1.6% 66,000
5 Citigroup Vikram Pandit $38,200,000 company lost $27.7 billion 322,800
6 Hewlett-Packard Mark Hurd $34,000,000 $26,000,000 7.4% 6,200
7 Calpine Jack A. Fusco $32,700,000 327% 2,000

This executive pay data is for 2008, from the New York Times article, Pay at the Top. Earnings and employee data for 2008 from Google Finance. I would not pay any of these guys 1% of what they were paid if I owned the company, myself.

These guys and their friends have created a culture where their looting is as accepted as the clothes the emperor is not wearing. We need to wake up and stop letting these people steal the bounty created by the employees, customers, community, suppliers, investors… They want a world where they can behave like nobility – taking whatever they want from the value created by others. And lately they have succeeded in creating such a world. They leave in their wake very weakened companies and societies.
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Management Blog Posts From December 2005

chart of executive pay 1990-2005

The executive pay excesses are so great now they will force companies to choose to:

  1. take huge risks to justify such pay and then go bankrupt when such risks fail (and some will succeed making it appear that the pay was deserved rather than just the random chance of taking a large risk and getting lucky).
  2. make it impossible to compete with companies that don’t allow such excesses and slowly go out of business to those companies that don’t act so irresponsibly.
  3. hope that competitors adopt your bad practice of excessive pay (this does have potential as most people are corrupted by power, even across cultural boundaries). However, my expectation is the competitive forces of capitalism going forward are going to make such a hope unrealistic. People will see the opportunity provided by such poor management and compete with them.

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.

  • Innovate or Avoid Risk – “There are many reasons why avoiding risks is smart and should be encouraged. But when avoiding risks stifles innovation the risks to the organization are huge.”
  • Quality, SPC and Your Career – “I believe far too often we look for the newest ideas and miss all the great ideas that have been known for decades but are not practiced widely. The key to success is applying good ideas well – not just applying new ideas.”
  • America’s Manufacturing Future – “The best hope, as I see it, for retaining manufacturing leadership in the USA is through increasing the adoption of management improvement methods including lean manufacturing.”
  • Ford’s Wrong Turn – “The biggest change needed is an improvement in management. Other things would also help greatly, such as improving the health care system.”

Looting: Bankruptcy for Profit

Looting: The Economic Underworld of Bankruptcy for Profit by George Akerlof, University of California, Berkeley; National Bureau of Economic Research (NBER) and Paul Romer, Stanford Graduate School of Business; National Bureau of Economic Research (NBER). George Akerlof was awarded the 2001 Nobel prize for economics. This is the abstract to their 1994 paper:

During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent – and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust.

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds.

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

That is exactly what has been happening. People that are not honorable and are given huge incentives to risk the future of all the other stakeholders for immense personal gain will do so.

via: New York Times Pulls Punches On Wall Street Bubble Era Pay

Related: CEOs Plundering Corporate CoffersObscene CEO PayWhy Pay Taxes or be HonestTilting at Ludicrous CEO Pay 2008Excessive Executive Pay

Japan Airlines CEO on CEO Pay

Nice webbast of CNN clip on Japan Airlines CEO cutting his pay to less than that of the pilots. He really seems to understand the company does not exist for him to plunder (unlike so many CEOs in the USA).

Related: Japan Airlines using Toyota Production System PrinciplesUnder Nishimatsu, Japan Airlines Tries to Rise Above LegacyRespect for Employees at Southwest Airlinesposts on executive payHonda executives not overpaid either

Tilting at Ludicrous CEO Pay 2008

I continue to tilt at the robber barron CEO pay packages (2007 post on CEO pay abuses).

2007 pay
rank
Company CEO Pay 5 Year Pay CEO % of 2007 Earnings
1 Apple Steve Jobs $646,600,000 $650,170,000
   
18.5%
2 Occidental Petroleum Ray Irani $321,640,000 $509,530,000
   
5.9%
3 IAC Barry Diller $295,140,000 $512,270,000
   
Company Lost Money
4 Fidelity National Financial William Folley $179,560,000 NA
   
138.4%
5 Yahoo! Terry Semel $174,200,000 $432,490,000
   
26.4%
7 Countrywide Financial Angelo Mozilo $141,980,000 $295,730,000
   
Company Lost Money
13 XTO Energy Bob Simpson $72,270,000 $215,280,000
   
4.2%

Data via: Forbes CEO Compensation (Total compensation for each chief executive includes the following: salary and bonuses; other compensation, such as vested restricted stock grants, LTIP payouts and perks; and stock gains, the value realized by exercising stock options.) and Google Finance (using 2007 earnings – Countrywide from SEC). I realize this chart could be improved by spending more time (the effect of stock options exercised in one year distorts things a bit but the excess are so massively huge that the clarity of the data does not need to be very precise).
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CEOs Plundering Corporate Coffers

Pointy haired bosses broke the code they provided on their site for embedding a Dilbert comic, so I removed the broken code.

Dogbert: “I am stepping down as CEO so I can spend more time with the money I stole from this hellhole.” Unfortunately we still have far too few people that see the obscene behavior of CEOs and their brooks brother bureaucrats as unacceptable. The behavior of many of them has been similar to that of dictators looting the coffers of their country as the country sinks into despair. The CEOs have their actions supported by a flock of board members that are also spared the condemnation their despicable behavior deserves.

I must say I am amazed at how brazenly those participating in looting companies from within are; and how it is accepted. It is a shame such unethical behavior is tolerated. It seems once companies implode their are some minor complaints about the behavior, in the specific case in question, as though it was not the accepted current practice among the many of those in positions of power (Warren Buffett being one obvious counterexample).

At some point I sure hope those looting companies and voting to support such things are seen for what they are. And I hope we don’t make excuses about how those taking what they didn’t deserve were somehow excused because they paid large sums of money to others to say such behavior was acceptable. Undermining all those that rely on a companies long term success is despicable behavior. That we accept those doing so and those board members supporting it as honorable members of society is a sad commentary on our society. I understand they feel entitled to loot when they see their neighbors buying castles around the world and helicopters and jets and… But their behavior is despicable.
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Customers Get Dissed and Tell

There are those rare companies where interacting with them is not a dreaded experience: Trader Joe’s, Southwest Airlines, Ritz Carlton, Crutchfield, Cannon, Groovix. There are not many. And even just providing something that just works is seen as a treat. The all too common dis-service, combined with the internet, leads to Consumer Vigilantes:

a growing disconnect between the experience companies promise and customers’ perceptions of what they actually get.

A swell of corporate distrust – exacerbated by high executive pay, accounting lapses, and the offshoring of jobs – has people feeling more at odds with companies than ever before.

Years of dialing the call center for a technician yielded at least eight missed appointments by Comcast, he says, but a post on ComcastMustDie brought a phone call the next morning and, later, a lead technician who showed up on time. Now, Salup says: “Anytime I have a problem, I also post it on the blog.”

Pretty lousy systems thinking (or really failures to think systemically). Pay executives obscenely and cut service until customers literally can’t stand you so much they don’t just want to avoid you they want you out of business.

And then instead of fixing the system, just burn the toast (follow the link for an explanation). Then wait from those that get the burnt toast to tell everyone that you sold them burnt toast. Then, after they do that, go scrape it for them. This is not what Dr. Deming meant when he encouraged companies to eliminate the need to inspect for quality. Of course you know that (you are reading this blog after all). Maybe the business schools decided to cut down Deming’s ideas to just eliminating inspection and a couple other sound bites. And then tell the MBA’s not to bother reading all the rest of that… we have to get on to the cost reduction strategies that will make sure you move into the c-level and get the real money.

Most customers, of course, don’t have the time or energy to go that far in their service insurgencies. They want an apology, a human being who answers the phone, or simply some bottled water after a few hours sitting on the airport tarmac

But some companies just push people so far they have to let people know about how poorly they have been treated. Some past posts highlight the frustrating experiences bloggers, including me, share about how badly we have been treated: Ritz Carlton (good) and Home Depot (bad)Incredibly Bad Customer Service from Discover CardMore Bad Customer Service ExamplesPoor Service, an Industry Standard? (HP)Comcast HD DVR Is Simply, Terribly Awful

Consumerist, is a great site, doing what it can to counter some of the horrible service.