Bloomberg
recently announced that “Golden Hellos” are on the rise amongst CEOs again,
which was more interesting because it was during the Swiss referendum on CEO
pay which focused on the of amount of CEO pay and pay differentials.
This came to my attention when in the late 1990s many CEOs
who were really “pre
turn around” CEOs received Golden Hellos, large pay packages during their
tenure and then Golden Handshakes as they left having damaged a good
organization. What made this worse was that many of these CEOs just went onto
the next company to do it again. This lead to the perception that once you were
in the “CEO” club you couldn’t be rejected regardless of performance.
Recently there have been further stories of CEOs being paid
huge sums for minimal
work, which has infuriated shareholders and employees. Some may
even argue that is bad for business.
As a result many companies are seeking approval from shareholders for
executive compensation, and in a number of situations shareholders have
revolted and denied these packages.
In discussing this with a headhunter I know, who works for a
firm which places many of these high paid CEOs, he said that they advised
clients to pay in the top 25% range to any new candidate because that is what
was required to land the candidate. This of course only increases the pay
levels across the board with everyone paying in the top 25% and leads to a
vicious upward cycle.
In addition, while CEOs are responsible for leading the
company, a number of studies have shown that no CEO by themselves is responsible
for the outcomes of the company, whether good or bad. However, while their pay
increases with good performance, bad performance seems to have no effect on
compensation. Furthermore, other studies have shown that the performance of
many of
CEOs is generally not that good.
One must ask how have we gotten into a situation
where CEOs are paid large amounts to join, to work, and then to leave, and these amounts are beyond what
should be expected. Like many commentators, I don’t believe that
legislation is the correct approach. What we are dealing with here is the age
old principal-agent problem of the difficulties in motivating one party (the
"agent"), to act in the best interests of another (the
"principal") rather than in his own interests.
However, in the case of a CEO, the board is there to protect
the shareholders’ interests and I would argue that if you are a CEO candidate,
you should negotiate to get the best package you can regardless of
performance. Thus all of the above
complaints and stories of excessive compensation are the basic responsibility
of the company’s
board.
This failure of so many boards in this area as well as
others, have been identified in the past. Sarbanes Oxley was enacted to prevent
board failures like Enron and more issues have come to light during the
Financial Crisis at the end of 2008 and following it. While legislative attempts to cure these
issues continue, maybe a boards and board member should have annual scorecards
showing their performance which might have greater success at improving
performance. A scorecard could look at issues of:
- CEO Turnover
- CEO Compensation Design
vs. shareholder value creation both short term and long term.
- A company failing after
awarding a large payment to departing CEO, e.g. Merrill Lynch in the
financial crisis.
- In calculating shareholder
value – look at the true value creation by taking taking into account
things like loss of value from M&A activity or other off balance sheet
items, e.g. Pepsi’s acquisition and later disposal of Snapple.
- Corporate behavior – receipt of fines by governmental and regulatory agencies as well as any other social issues that the board deems important.
- Perception and value of the brand
- Board composition
- Selection of board advisors and conflicts of interest
- Multiple fiduciary duties
- Failure to understand the risks faced by the company, e.g. AIG
While it is hard to measure the board members individually
on all of these, some items could be measured individually and scores given
both individually and generally. Thus if a director was on a number of boards
with failing grades it, it should make it harder to appoint them to a new
board, thus leading to a Kaizen (“continuous improvement”) of board members.
