Despite the astronomical discrepancy between the compensation of most chief executive officers and average employees, some companies' actual performance doesn't always match the rich pay and perks their CEOs often receive.
Vast amounts of shareholder capital get squandered as these so-called leaders forget or ignore their duty to shareholders. CEOs shouldn't feel entitled to lucrative pay and preposterous perks if their performance isn't up to snuff.
From the everyday to the extreme, I've rounded up a few examples that should make self-respecting shareholders pause -- or shudder.
Slippery slopes for shareholders
Abercrombie & Fitch's (NYSE: ANF ) CEO Michael Jeffries ranked high on a list of well-compensated CEOs for 2008. What has Jeffries done during his tenure to do deserve that plush reward? Well, for starters:
- The retailer's shares fell 70% in 2008.
- Sales growth has slowed dramatically since the fiscal year ended January 2006.
- Earnings per share have fallen steadily since the year ended February 2008.
But that's all in the past. Surely, Jeffries turned things around in Abercrombie's most recent fiscal year, right? Wrong:
- The retailer's revenue dropped 17.3%.
- Same-store sales plummeted 23%.
- Earnings per share took a 70.8% swan-dive.
While not every example is as egregious as Jeffries', even well-intentioned CEOs can still send the wrong message. Starbucks' (Nasdaq: SBUX ) Howard Schultz asked the company's board to reduce his salary last year. However, a discretionary bonus awarded later in the year took a little of the feel-good "oomph" out of his earlier gesture.
Starbucks did improve profitability in 2009, and like many other retailers, its stock certainly soared (deservedly or not). But let's not forget that Starbucks was closing cafes and firing workers while Schultz collected his extra cash. His "discretionary bonus" sounded a little indiscreet -- and maybe a little indecent -- given the circumstances.
Still, Schultz looks angelic compared to some of his peers. InfoGroup's (Nasdaq: IUSA ) founder and former CEO Vinod Gupta recently settled with the SEC over allegations that he embezzled $9.5 million from his company. The cash allegedly funded a whopping nine vacation homes in places like Maui and Las Vegas, yachts, private jet travel, and -- I kid you not -- something like 20 fancy cars, including a Humvee, a Jaguar and not one, but two Mercedes.
We need a positive attitude adjustment
Many individual investors shrug off corporate managers' money misdeeds, forgetting that each share they own represents a real piece of a company. They accept the status quo, believing that selling their stock is their only recourse when faced with disturbing behavior from their companies' leadership.
Meanwhile, large institutional shareholders' focus on short-term performance, often tied to the vagaries of bipolar Mr. Market, can further encourage CEOs to ignore true operational performance and abandon responsible behavior. And weak boards of directors certainly don't keep executives' pay packages (or egos) in check.
Too often, top executives face few if any real consequences for poor performance, which may foster even more apathy among shareholders. When Stanley O'Neal, former CEO of Merrill Lynch, was ousted from his failing, risk-riddled company, he didn't just receive a golden parachute -- he also ended up on the board of directors of Alcoa (NYSE: AA ) with startling speed. No wonder so many investors grudgingly believe that this behavior will never change.
A few bright spots
Happily, all is not lost in the quest to better align CEOs' pay and performance. When corporate governance expert Nell Minow spoke at the Fool last fall, she counted Berkshire Hathaway's (NYSE: BRK ) (NYSE: BRK-B ) Warren Buffett and Costco's (Nasdaq: COST ) Jim Sinegal as among the few CEOs who responsibly pin their pay to their performance.
Furthermore, at least one wayward top executive will pay the price for his malfeasance. As part of his settlement with the SEC, InfoGroup's Gupta is barred from ever serving as a CEO or a director again. His banishment should serve as a welcome reminder for managers to check themselves before they wreck themselves.
Meritocracy, not mediocrity
When managers think they're entitled to pig out at shareholders' expense, are they really the best stewards for the companies you own? Fools, remember -- that's your capital on the line. Doing nothing when faced with executives' bad behavior condemns you to a mediocre investment at best, and invites an all-out business disaster at worst. Shareholders who voice concern -- or even outrage -- over these lousy situations aren’t bad for business; they're champions of good capitalism.
Hopefully, more companies will adopt say-on-pay policies, to more forcefully tie CEO pay to true operational performance. That way, shareholders will no longer passively submit to repeated muggings from power-tripping managers.
Knowing how prudent and responsible managers behave, and keeping a sharp eye on those who exhibit troubling signs, is the first step to a more robust and shareholder-friendly marketplace.