Monday, July 26, 2010
The debate over CEO pay has been in the front of the press and discussed for years. Whether during up-cycles or downturns, most observers have a very specific focus for their criticism or praise when it comes to CEO compensation. The current economic times has forced the topice of CEO pay to the surface once again
In a June 1, 2006 article, “The great overpaid CEO debate” published on CNET News, by Fred Whittlesey; CEO overpayment was attributed to, “too much power, inattentive boards of directors, conflicts of interest by compensation consultants, [and] the use of stock options”. At the time, Whittlesey was the Chief Compensation Officer with PayScale, currently he is with the Hay Group in Seattle. Whittlesey, in his article, suggests that comparing CEO pay to the average line worker is a “flawed calculation[s]”, of course it is. CEO’s make or break entire organizations with their leadership; a line worker makes or breaks a tool, a single product, or at worst, a day’s production. To compare the impact of a CEO with that of a single line worker is analogous to contrasting a 4-door passage car and an 18-wheel tractor-trailer. Both can be in the top of their lines, both can be relatively expensive; however, both have their distinct functions. Rarely are the two interchangeable.
A recent report brought CEO pay to the public’s attention when Ed Smith, a Chicago alderman pointed out the disparity between the pay of Wal-Mart CEO Michael Duke and the “average” Wal-Mart employee in a planned store in Chicago’s Pullman neighborhood. Alice Gomstyn of ABC NEWS’ Business Unit reported on the July 2, 2010 story in an article titled, “Walmart CEO Pay: More in an Hour Than Workers Get All Year?”, and pointed out a few errors in Alderman Smith’s facts. According to Wal-Mart’s 4th quarter earnings report 2009 net sales exceeded $405 billion. Gomstyn reported that Equilar, the executive research firm, placed Duke’s earnings at an amount just below $20 million in 2009, excluding any performance awards. That means Duke’s pay was just under 1/2 of 1% of net sales for 2009.
In a Bloomberg BusinessWeek article,”CEO Pay Drops, but…Cash Is King”, released on March 25, 2010, and authored by Jessica Silver-Greenberg, Tara Kalwarski, and Alexis Leondis, it was reported that CEO pay actually fell 8.6% in 2009. Certainly, this would be expected in the light of a weak economy and a sluggish recovery? However, the authors’ analysis pointed to a troublesome fact, while overall CEO pay fell for the 81 companies studied, the portion of total compensation for CEO’s which constitutes cash rose. At issue, here is that companies generally use long-term non-cash incentives e.g., stock options as a means to tie CEO performance to organizational market share growth and financial achievement. Moreover, organizations often do this over extended periods in order to increase that market place growth and thus return value to shareholders. By the way, many of those shareholders are public and private pension funds and 401(k) mutual funds. If organizations refocus their attention from long-term incentives to shorter-term cash, the value returned to shareholders, including pension and 401(k) funds, could be negative.
Devin Leonard in a special report “Bargain Rates for a C.E.O.?” on executive pay in the New York Times on-line version for April 2, 2010, reported that many top executives saw their pay come under increased scrutiny as the recession continued to reverberate throughout the world’s economies and as the US government and Congress looked deeply into CEO pay practices. Moreover, it must be expected, after agreeing or being “encouraged” to take billions in bailout monies, many organizations had their compensation practice brought to the light of day and questioned. Kenneth Feinberg, President Obama’s “pay czar” has a number of recommended pay changes for CEO’s including paying for some perks out of their own pockets. In a surprise move, Feinberg, suggested that more of a CEO’s pay should be in the form of stock. What a radical concept.
It is clear that like many other activities in the world today, CEO pay has become the focus for many to direct their energy and maybe even their anger. Whether it is the Chicago alderman who perceives the gap between Wal-Mart’s CEO and store employees should be narrowed or Kenneth Feinberg who wants more CEO compensation tied to stock, everyone has an opinion. At the most basic level it is a highly charged and emotional issue, most of us feel that we deserve the same as the person next to us. The problem is that CEO pay decisions should made in the boardroom and not in a Congressional caucus room.
A recent report brought CEO pay to the public’s attention when Ed Smith, a Chicago alderman pointed out the disparity between the pay of Wal-Mart CEO Michael Duke and the “average” Wal-Mart employee in a planned store in Chicago’s Pullman neighborhood. Alice Gomstyn of ABC NEWS’ Business Unit reported on the July 2, 2010 story in an article titled, “Walmart CEO Pay: More in an Hour Than Workers Get All Year?”, and pointed out a few errors in Alderman Smith’s facts. According to Wal-Mart’s 4th quarter earnings report 2009 net sales exceeded $405 billion. Gomstyn reported that Equilar, the executive research firm, placed Duke’s earnings at an amount just below $20 million in 2009, excluding any performance awards. That means Duke’s pay was just under 1/2 of 1% of net sales for 2009.
In a Bloomberg BusinessWeek article,”CEO Pay Drops, but…Cash Is King”, released on March 25, 2010, and authored by Jessica Silver-Greenberg, Tara Kalwarski, and Alexis Leondis, it was reported that CEO pay actually fell 8.6% in 2009. Certainly, this would be expected in the light of a weak economy and a sluggish recovery? However, the authors’ analysis pointed to a troublesome fact, while overall CEO pay fell for the 81 companies studied, the portion of total compensation for CEO’s which constitutes cash rose. At issue, here is that companies generally use long-term non-cash incentives e.g., stock options as a means to tie CEO performance to organizational market share growth and financial achievement. Moreover, organizations often do this over extended periods in order to increase that market place growth and thus return value to shareholders. By the way, many of those shareholders are public and private pension funds and 401(k) mutual funds. If organizations refocus their attention from long-term incentives to shorter-term cash, the value returned to shareholders, including pension and 401(k) funds, could be negative.
Devin Leonard in a special report “Bargain Rates for a C.E.O.?” on executive pay in the New York Times on-line version for April 2, 2010, reported that many top executives saw their pay come under increased scrutiny as the recession continued to reverberate throughout the world’s economies and as the US government and Congress looked deeply into CEO pay practices. Moreover, it must be expected, after agreeing or being “encouraged” to take billions in bailout monies, many organizations had their compensation practice brought to the light of day and questioned. Kenneth Feinberg, President Obama’s “pay czar” has a number of recommended pay changes for CEO’s including paying for some perks out of their own pockets. In a surprise move, Feinberg, suggested that more of a CEO’s pay should be in the form of stock. What a radical concept.
It is clear that like many other activities in the world today, CEO pay has become the focus for many to direct their energy and maybe even their anger. Whether it is the Chicago alderman who perceives the gap between Wal-Mart’s CEO and store employees should be narrowed or Kenneth Feinberg who wants more CEO compensation tied to stock, everyone has an opinion. At the most basic level it is a highly charged and emotional issue, most of us feel that we deserve the same as the person next to us. The problem is that CEO pay decisions should made in the boardroom and not in a Congressional caucus room.
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