Executive Compensation and the Swallows of Capistrano

Like the annual return of the swallows to Capistrano, the annual executive compensation right of spring has begun.  Public companies, most of which have fiscal years that end December 31 hold annual meetings early in the year and, as a result, produce proxy statements during the first three or four months of the new year.  Companies are uniform in the timing of disclosure because of the need to have proxy statements come out at the same time as annual reports on Form 10-K so that both can use the same disclosure (including audited financial statements).  As a result, by April of each year, we have most of the proxy statements of the largest public companies and are treated with comparisons of the compensation paid to the CEOs of the largest public companies.  

In its Sunday edition, the NY Times made such a comparison.  In characterizing the disclosure, the NY Times noted an increase in non-performance based compensation.  This is of course no surprise.  As stock markets fall and performance targets become harder to make, boards search for ways to nonetheless pay handsome amounts of compensation.  Moreover, some CEOs apparently benefited from economic conditions that likely had little to do with their managerial acumen.  Oil prices going over $100 a barrel is an obvious example.  As the NY Times noted:

• Certainly, some of the highest-paid chiefs — including Lawrence J. Ellison of Oracle, Alan G. Lafley of Procter & Gamble and Lloyd C. Blankfein of Goldman Sachs — presided over companies that did very well. But in other cases, it was hard to see a connection between high pay and savvy management.
• Soaring oil prices, not stellar strategy, brought huge profits to many oil companies last year, yet Ray R. Irani, chief of Occidental Petroleum, saw his compensation rise 21 percent, to $33.6 million making him the sixth-highest-paid executive in the group of 200 in the survey.

So who are the top 10 highest paid CEOs as reported by the New York Times?

• Larry Ellison, Oracle ($61 million)
• Ken Chenault, American Express ($50 million)
• Ray Irani, Occidental Petroleum ($33.6 million)
• Robert Iger, Disney ($27.6 million)
• Mark Hurd, Hewlett Packard ($26 million)
• Rupert Murdoch, News Corp. ($24 million)
• Robert Stevens, Lockheed Martin ($24 million)
• William Weldon, Johnson & Johnson ($21.79 million)
• Neville Isdell, Coca-Cola ($21.6 million)
• Sam Palmisano, IBM ($20.9 million)

As the swallows return each year, one web site noted:  "It’s difficult to understand how they do it, or why they come here. The fact is, they have been doing it for centuries in fulfillment of some inner biologic destiny."  Perhaps the same can be said of CEO compensation, difficult to understand but driven by an inner biologic destiny.   

Comments

[James McRitchie]

Also interesting was Ben Stein"s "In the Boardroom, Every Back Gets Scratched." Shareowners have little say and the boards that do are beholden to managemen for their positions. "How do you keep your job? You are really nice to the person who put you in that job. You don’t know the little stockholder in Muncie who might have 500 shares. But you do know the guy who repeatedly reappoints you for your post at the directors’ table." The system "shrieks greed and contempt for shareholders and workers."

[m. hodak]

"This is of course no surprise. As stock markets fall and performance targets become harder to make, boards search for ways to nonetheless pay handsome amounts of compensation."

That's the cynical possibility. Another one is that as the SEC puts more pressure on companies to disclose specific performance targets, companies are eschewing performance targets that would need to be disclosed. No on would argue that is a good thing, but it illustrates how the unintended consequences of government mandates often swamp the intended effects.