Most of us work hard for our money -- and by extension, we work hard for the money that we invest in companies' stocks, in the hopes that those dollars will in turn work hard for us. As investors, it can often be sobering to take a hard look at management compensation information in a company's proxy materials. Forbes made it easy to gauge executives' pay with its recently released annual review of CEO compensation, and by the looks of it, these folks sure aren't hurting.
Not surprisingly, the AFL-CIO tracks this sort of thing, too. According to the labor organization, the rate at which CEO pay rose slowed last year, but the average pay for a CEO of an S&P 500 firm remained 430 times that of the average worker.
Many of us own shares of companies enjoying good performance, and I realize that top-tier management needs a financial incentive to excel (and not to jump ship). But it's harder for me to fathom the CEOs who get lavishly paid for a job that's not so well done. Who are these guys (and gals) working for, anyway?
I'm not the only one who can't tolerate overpaid, underperforming CEOs. There has been increasing buzz -- not to mention shareholder resolutions -- about some companies that seem to reward CEOs in illogical ways, or for sub-optimal performance.
The great disconnect
I recently reported that while Gap's (NYSE: GPS ) Paul Pressler didn't get a bonus last year (boo hoo), he still managed to take home more than $4 million. That's not bad for somebody who was supposedly getting a slap on the wrist for the company's weak performance -- to say nothing of the $15.2 million worth of stock options he also received.
It's hard to understand why Pressler would take home more than the CEOs of companies like Starbucks (Nasdaq: SBUX ) or eBay (Nasdaq: EBAY ) , both of which have delivered far better returns to shareholders. Pressler also made more than the CEO of McDonald's (NYSE: MCD ) -- which seems a bit ironic, given that McDonald's already pulled off a turnaround.
It's hardly uncommon for CEO pay to exceed what shareholders consider reasonable, as the Forbes feature demonstrated. For example, Sun Microsystems' (Nasdaq: SUNW ) former CEO and co-founder Scott McNealy's average compensation over the past six years has been $13.3 million. However, the company's annualized return over the same time frame has been -31.5%.
The long, expensive goodbye
Speaking of departures, I'm also baffled by crazy payouts to outgoing CEOs. Companies can protest all they like about "CEO superstar status," but the idea of paying someone millions of dollars for years after he or she last darkened the company's doorstep makes me wonder whether greed has gotten the best of company managers.
For example, Burger King CEO George Brenneman abruptly announced his resignation recently, right after the company posted a net loss for its fiscal third quarter. Lucky for him, he signed an agreement with Burger King to ensure that he receives his base salary of $1.03 million for three years, and his annual bonus of $2.06 million for fiscal 2006. Thanks for the memories, indeed.
ExxonMobil's (NYSE: XOM ) Lee Raymond received a severance package worth $400 million. True, he spent more than 40 years at the firm, but I'd say most individual investors would view that as an awfully pricey going-away gift. I doubt many consumers appreciate it, either. Energy companies' soaring profits have recently grown controversial as many Americans struggle with high gas prices.
Own up to your ownership
I guess corporations figure that the only way they'll attract major star power is to give executive candidates the impression that they're guaranteed loads of money even if they stink at what they do -- and that they'll pocket even more money if they up and quit, and will have ample supplies of perks like flowers, wine, corporate apartments, and a lifetime seat on the corporate jet.
In truth, the peer-based compensation argument often seems to benefit management more than shareholders. Most of us common workers are repeatedly told that while our beginning salaries may be tied to what our peers make, our performance will ultimately propel our salary to higher levels.
Shareholder resolutions regarding exorbitant management compensation and other corporate governance issues have gained increasing attention in the business world. Indeed, great investing minds (including Warren Buffett, no less), have brought up the idea that excessive pay for CEOs is a systemic problem -- the result of boards of directors that have forgotten their responsibility to do right by shareholders and rein these folks in. In polite society, it may be hard to tell a CEO who seems like a bang-up guy that he's not getting a bonus this year. I'm sure that most of us shareholders would say, "Well, tough," if we felt the CEO in question didn't deserve it. Most of us have been told plenty of times that business and investing aren't popularity contests, and that emotions shouldn't get in the way of running a profitable business.
I've been thinking a lot about these issues because I recently read The Battle for the Soul of Capitalism, a book by retired Vanguard founder and CEO John Bogle. In his discussion of what has gone wrong with American capitalism -- and led to disgraceful events such as the scandals at Enron and Tyco -- Bogle highlights a shift to corporate policies and attitudes that benefit the managers, not the owners, of America's businesses.
As owners, many of us may feel that our only empowerment is to sell a company's stock if we feel that its management doesn't share our interests. Many shareholders don't feel like they have a voice; institutional investors hold large stakes in many companies, making shareholder voting feel like a fairly futile exercise. However, the increasing attention paid to the content of shareholder resolutions indicates that how companies are run, and whether they are run to the benefit of shareholders, is definitely in the public eye. Maybe it's a crazier concept than crazy CEO compensation, but I have to hope that maybe we shareholders will one day find ourselves less passive, and more powerful. We need to acknowledge that managers should have our interests in mind, and demand more stewardship from corporate leaders.