Date:
Thu, 13 Jun 2002 14:37:58 -0400
From:
King Michael <mking@iamaw.org>
From: News and Views | BizNews |
Sunday, June 09, 2002
Payback Time for CEO Hogs
New Daily News columnist Lou Dobbs
By LOU DOBBS
The average CEO's paycheck is now more than 500 times bigger than that of the average
worker.
The runaway salaries and huge stock option packages lavished on
CEOs are the greatest symbols of the abuses and excesses of the past few years. And, let's face it, there
have been a lot of abuses and excesses, from the scandals surrounding corporate accounting
shenanigans to the research and investment-banking secret handshakes.
Yes, of course, performance should be rewarded, but many CEOs are now wildly
overcompensated — regardless
of results.
Case in point: After-tax profits among companies in the S&P 500 fell by nearly 50% last year, as
recently reported in The Economist. At the same time, total executive compensation of CEOs was
down by just 2.9%. In other words, while nearly 2 million Americans lost their jobs during last
year's earnings slump, the corporate elite — the people responsible for earnings
performance — enjoyed the same fat paychecks. This is simply unacceptable.
Another case in point: Tyco's former chief executive, Dennis Kozlowski, who made headlines
last week for being indicted for sales tax evasion. Kozlowski, who made more than $300 million
over the past three years, recently won the dubious honor of being named one of the five
executives who gave shareholders the least for their pay, according to a special report by
BusinessWeek.
While Kozlowski has left in disgrace, three of the other top four executives on the list — Larry
Ellison of Oracle, John Chambers of Cisco and Peter Karmanos of Compuware — are still at the
helms of their companies. The fourth, Louis Gerstner of IBM, has ceded his chief executive
responsibilities, but still serves as the company's chairman.
And how have their stocks performed recently? Oracle now trades nearly 60% below its 52-week
high. Cisco is down nearly 30% from its peak. Compuware is off 50%. And IBM is down nearly
40%. Enough said.
The disparity wasn't always this dramatic. The average CEO made 42 times what the average
worker did in 1980 and 85 times in 1990, according to BusinessWeek. But in the past
decade, the ratio soared to 531 times average worker pay.
So What Went Wrong?
First, the use of stock options as a major portion of executive pay exploded during the 1980s and
1990s. And for good reason: Companies aren't required to expense stock options, so boards can
give them out in piles with no impact on a company's income statement.
While the stock market was booming, the "great options giveaway" seemed perfectly logical —
after all, shouldn't executives benefit if their companies delivered spectacularly? But, as the
market began to sputter and then spiral downward, many companies simply repriced their
options — ensuring that executives benefited regardless of how well, or how poorly, their
companies performed.
And the issue goes well beyond options. Some corporate board compensation committees have
simply bent or changed the rules on overall CEO pay packages when performance standards
weren't met.
For instance, in late 2000 Coca-Cola offered to award its CEO, Douglas Daft, as many as 1
million shares — worth nearly $60 million at the time — if the company met annual average
earnings-per-share growth targets of 20% over five years. However, several months later, after
Coke was forced to reduce its earnings goals, the company simply cut the performance targets
linked to Daft's stock deal.
What's the Answer?
Frank Glassner, CEO of the Compensation Design Group and an expert on CEO pay, says: "The only
way to change it is for the boards to take their heads out of the sand and start making those
hard decisions. If a CEO in a company is not performing, they have to make the hard decision
to say no, we're not going to pay your bonus this year. No, we're not going to give you an
additional grant of stock options."
Great. But what exactly will it take to get corporate boards to — finally — pull their heads
out of the sand and restore some reason to this process?
As we've seen, corporate boards and the CEOs they oversee can't be trusted to self-police. And
regulators will likely be too busy trying to save face following the corporate accounting and
brokerage research imbroglios. The answer, as usual, may well depend upon investors.
Under growing pressure from its shareholders, E*Trade's CEO Christos Cotsakos was recently
forced to accept a reduced compensation contract. Under the terms of his new deal,
Cotsakos will receive around $40 million for 2001 (down from nearly $80 million in his original
package). Considering that E*Trade lost $242 million for the same period, that's still what some
would call a pretty sweet deal and what others — including myself — would still call an outrage.
P.S.: No surprise, E*Trade has since announced it
will make changes to its compensation practices.
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