Executive Compensation Introduction

February 2008

How much should a CEO or the top executive officers of a publicly-owned corporation be paid?  What is a “fair” compensation?  Especially when corporations are laying off thousands of workers and outsourcing work to distant lands?  When the middle class is under attack – see CNN Lou Dobbs’ commentary on this?  The issue of exec comp has become a burning question with an array of forces on all sides of the issue.  When the stock market is doing well and “all boats are rising,” the issue is not as much in focus as when companies (or a single firm) is underperforming and the executive compensation is seemingly out of whack.  Out of control. Disproportionate to performance.  Unrelated to reality.  And other battle cries by investor activists, public officials, journalists, advocate organizations, etc.

Consider the case of Home Depot, where the share price fell as the CEO’s pay package rose.  Saying goodbye to the CEO, Mr. Nardelli, cost HD more than $200 million.  Consider the exiting of the Wonderful Wizards of Wall Street, and their departure comp packages – totaling in the hundreds of millions’ of dollars – as the wreckage they’ve left behind (in the form of sub prime disaster loan portfolios) causes real pain on Wall Street, and on Main Street.  We still don’t know the damage they caused with their financial wizardry – but the carnage is felt when home foreclosure rates increase dramatically, as they have over the past year.

So – what is a fair price for the Top Man (and a tiny handful of Top Women)?  You’ll find news, commentary, research and other useful content here in this Hot Topic subsection of Accountability Central, as well as in various content sections and subsections.  (See Corporate Governance, Shareowner Activism, Socially Responsible Investment, and other silos.)

Consider this as you formulate your own positions on the pay issues:

• Aristotle believed (2400 years ago) that no Citizen of Greece, the first western democracy, should be paid more than seven (7) times that of the lowest earner.
• The military organizes its service members in two classifications (officer and enlisted ranks), and has a well-structured pay scale (grade, steps in grade etc.) for everyone from privates to general officers and admirals.  Eight pay grades seem to cover one of the largest public institutions in America – the armed services.
• For many years, especially in regulated industries such as airlines, telephone companies and electric utilities, the military model could often be found. The ratio of pay, say at American Airlines in the regulatory format was $60,000 in 2008 dollars for the lower rank of manager and $600,000 for CEO (10-1) – how quaint!  And consider the disastrous state of airline pay ratios today, as service crumbles and CEO pay soars like the silver-winged jet aircraft!
• Two decades ago the executive pay system (above) began to change dramatically, and the ratio of highest-to-lowest paid moved from 10-1, or 30-to-1, or 50-to-1 to 300-to-1 or more today.  (Some CEO’s make 1,000-to-one, comparing their pay package to the lowest salaried worker.) 
  
• The total pay packages of the top ranked corporate officers are so complex that even board of directors – granting the goodies – cannot understand them.  (Is this good for shareowners, who are represented by the board of directors?)
• Beginning in January 2007, companies had to report in depth on the total pay packages of the top five (5) highest ranked decision-makers in the corporation.  This is the “CD&A” – the SEC-mandated Compensation Disclosure & Analysis.  For the first time in theory everything is on the table now for inspection, including summaries in easy-to-understand charts.  The second year’s CD&A’s will be reaching shareowners soon.  The SEC’s analysis of the quality of the first year’s disclosure was not a happy time for many of the companies issuing their first CD&A.  Will improvements be made in the Year Two disclosures (covering compensation in 2007)?  Stay Tuned!
• Finally, many proxy contests soon to become more visible – as shareowners exercise their rights to put non-ordinary business on the shareowner-wide voting ballot – many resolutions will refer directly to or indirectly involve senior executive compensation. 

Enough highlights and commentary – we invite you to follow the often-heated discussions and public debate on executive compensation here in the pages of Accountability Central.

The Editors

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