Tag Archives: overpaid executives

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
   
9.5%
XTO Energy Bob Simpson $59,489,924 $1,860,000,000
   
3.2%
Goldman Sachs Lloyd Blankfein $54,300,000 $9,537,000,000
   
.6%
Occidental Petroleum Ray Irani $52,822,584 $4,182,000,000
   
1.4%
Merrill Lynch E. Stanley O’Neal $46,375,347 $7,499,000,000
   
.6%
Danaher H. Lawrence Culp, Jr. $46,215,671 $1,122,000,000
   
4.1%
Countrywide Financial Angelo Mozilo $42,994,306 $2,674,000,000
   
1.6%
Morgan Stanley John Mack $41,400,000 $7,472,000,000
   
.6%
Ford Alan Mulally $39,128,100 $1,540,000
   
2540.7%
Apollo Group Todd Nelson $32,626,442 $415,000,000
   
7.9%
AT&T Edward Whitacre $31,765,761 $7,356,000,000
   
4.3%

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.
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Exposing CEO Pay Excesses

The politics of pay from The Economist:

Although barely one-tenth of the 2,000 biggest American companies have yet reported under the new rules, the tally of negative headlines is already mounting. “There are already plenty of examples of firms reporting chief-executive pay packages of millions of dollars more than expected,” says Paul Hodgson of the Corporate Library, a research firm. He reckons that the firms that have already reported are a representative sample likely to provide a good indication of the overall trend.

Thankfully, more of the ludicrous pay packages details are being made public and shame will force some changes (those approving these pay packages have to justify such reckless spending). Of course, some feel no shame no matter how egregious the situation. As I mentioned earlier, I would add excessive executive pay to Deming’s seven deadly diseases of western management. We need to drastically role back the luducrous pay packages.

Related: More on Obscene CEO PayExcessive Executive PayToyota’s CEO pay under $1 millionWarren Buffett on Excessive CEO PayCompensation at Whole FoodsBloated CEO salaries, subsidized by taxpayers, undermine American valuesCEO Compensation: A Problem That Just Gets Worse

Compensation at Whole Foods

Compensation at Whole Foods Market [the link that Whole Foods broke was removed]

Most large companies also pay their executives large amounts of stock options in addition to large salaries and cash bonuses. However, this is not the case at Whole Foods Market. As the chart below indicates, the average large corporation in the United States distributes 75% of their total stock options to only 5 top executives with the remaining 25% going to everyone else in the company (actually most of the remaining 25% goes to the next level of executives below the top 5). At Whole Foods, the exact opposite is true: the top 16 executives have received 7% of all the options granted while the other 93% of the options have been distributed throughout the entire company with all Team Members eligible for a grant after 6,000 hours of service to the company.

This is the kind of data you would expect if people are the organization’s most important resource. If instead senior management thinks the company exists to fund their lavish lifestyle and only needs to do other things like provide value to customers, reward investors, provide meaningful work to all employees… as a way of funding lavish living by CEOs you get the behavior discussed in: Graph of Obscene CEO Pay, More on Overpaid CEO’s and Excessive Executive Pay.

Whole Foods CEO Pay [the broken link was removed]

Related: Excessive Executive PayThe Purpose of an OrganizationWarren Buffett’s Shareholder LetterStarbucks: Respect for Workers and Health Care

More on Overpaid CEO’s

CEO pay up big – but not performance:

The Corporate Library analyzed the compensation of nearly 1,400 chiefs for its annual report on CEO pay. The group’s median total compensation rose 16 percent between 2004 and 2005. A year earlier, CEOs got a bump of 30 percent in total compensation, which includes salary, bonus, perks, exercised stock options and other long-term incentive pay.

This is more bad news. As Drucker, Buffet and many others have said CEO overpayment is bad for companies, workers and shareholders. Even when they are fired they often take away tens of millions of dollars. Absolutely ridiculous. I sure hope the bubble of CEO pay bursts soon – the only suitable comparison this century is the internet stock bubble. But every year it just gets worse. I would add overpaying CEO’s to Deming’s seven deadly diseases of western management.

Related: Excessive Executive PayWarren Buffet on ridiculously out of line executive compensationExcessive CEO PayMore on Obscene CEO Compensation

Excessive CEO Pay

Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation by James B. Wade, Charles A. O’Reilly, III and Timothy G. Pollock:

We also find evidence suggesting that CEOs serve as a key referent for employees in determining whether their own situation is “fair,” and this influences their reactions to their own compensation. More specifically, we find that when lower-level managers are underpaid relative to the CEO, that is, underpaid more than the CEO or overpaid less, they are more likely to leave the organization.

Essentially if the CEO is extremely overpaid, even if other executives and managers are overpaid (compared to those outside the company) the others feel they are not being treated fairly and turnover increases. Their data is from the 1980’s and they argue (sensibly to me) that the effects may be larger now. We have all seen CEO pay become much more excessive in the last few decades. That fact, convinced Drucker that the issue of unfair CEO pay demanded very strong denunciation from him over the last decade of his life.

Related: Excessive Executive PayMore on Obscene CEO PayWarren Buffett’s Shareholder LetterManagement Guru Peter Drucker 1909-2005Trust: Respect for PeopleDrucker Opinion Essays from the WSJToyota’s CEO ethical pay:

In a reflection of Toyota’s team-oriented approach, its executive pay is paltry by U.S. standards. Analyst Ron Tadross at Banc of America Securities estimates the total annual compensation of Toyota’s CEO at under $1 million – about as much as a vice president at GM or Ford Motor Co. makes in a good year.

CEO’s that take such unethical large pay today are the robber barons of today and will deserve the judgement of history for the actions they take (I would imagine they are perfectly happy to take the money now and worry about opinions later). And those that approve such pay also deserve sharp criticism.

More on Obscene CEO Pay

graph of excessive CEO pay

Study site: CEO-worker pay imbalance grows includes the graph above.

Unfortunately this reverse robin hood (steal from the workers, stock holder, customers…) and give to the CEO tale continues. Hopefully someday soon we can at least turn the momentum in the right direction (stopping these incredibly excessive “pay” packages). Even then it will take quite a deal of reducing these ridiculous “pay” packages to reach some sense of decency. CNN article based on the report: CEO Paycheck: $42,000 a day by Jeanne Sahadi:
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Drucker Opinion Essays from the WSJ

The Wall Street Journal has posted selected opinion essays by Peter Drucker [the broken link was removed] along with several tributes to Drucker.

The Five Deadly Business Sins (article removed so link removed), 1993:

  • the worship of high profit margins and of “premium pricing”
  • mispricing a new product by charging “what the market will bear
  • cost-driven pricing
  • slaughtering tomorrow’s opportunity on the altar of yesterday
  • feeding problems and starving opportunities

Is Executive Pay Excessive?, 1977. In 1977, his answer was, no. As pay did become excessive, Drucker became a prominent voice against the unjust pay of CEO’s.
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Excessive Executive Pay

Topic: Management Improvement

Via Christian Sarkar, Too Many Turkeys, The Economist:

Executive compensation in America – already far ahead of the rest of the world, despite the best efforts of overseas managers to catch up – is now rising inexorably again. In fiscal year 2004 the total compensation of the median American company boss rose in every industry… according to a new report by the Conference Board, a research organisation. In the big companies that comprise the S&P 500 index, median total chief-executive compensation increased by 30.2% last year, to $6m, compared with a 15% rise in 2003

Christian Sarkar asks, can we outsource the CEO to a low-cost country? That is exactly what will happen at the ludicrous levels pay has risen to. If the United States were to lock into a payscale that is unsustainable globally US companies will not be able to compete. My guess is plenty of people in the USA will be glad to compete against the brooks brothers bureaucrats but if not, others will.

The excesses are so great now they will either force companies to:

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