Those Poor, Poor CEOs!

OK, now we're officially in a recession. The latest data suggests that U.S. CEO compensation has decreased for the second year in a row, receding to 2004 levels. Nonetheless, don't expect to see these folks rummaging through the trash anytime soon. Plenty of top executives still enjoy handsome rewards, despite investors' growing awareness that many CEOs cash in at shareholders' -- and workers' -- expense.

Hooray for deflation!
Several surveys currently show substantial drops in total CEO compensation in 2009. The New York Times tapped Equilar, which said that median CEO pay dropped 13%. A USA TODAY survey based on The Corporate Library's data indicated that median CEO pay dropped 18% to $6.6 million.

Note that these surveys included small numbers of companies. Don't be too surprised if a larger sample later yields different results.

These indications that CEO compensation has taken a two-year hit are frankly a relief, in the larger context of our suffering economy. The recession has hurt many people, and chief executive officers should not be some parasitic, protected class, immune to their fair share of hardship.

Furthermore, the typical U.S. CEO's pay has crept upward over the years, until it represents hundreds of times the typical worker's salary. CEO compensation got way out of whack during way too many bubbly go-go years. In many cases, I'd say a little pay deflation's way overdue.

Recession? What recession?
Unfortunately, well-paid outliers persist. I've compiled few of the more dubious data points for 2009:

  • Kraft's (NYSE: KFT  ) Irene Rosenfeld pulled down $26.3 million, a 41% increase year over year. That jump outpaced salaries at consumer-goods rivals like Pepsi (NYSE: PEP  ) . Given the stock's lackluster performance compared to the Dow, and a drop in Kraft's annual revenue, Rosenfeld's impressive raise seemed to mostly hinged on the company's hostile takeover of Cadbury, which Berkshire Hathaway's (NYSE: BRK-B  ) Warren Buffett notably criticized as an overpriced deal.
  • AT&T (NYSE: T  ) CEO Randall Stephenson's total pay rose 35% to $20.2 million, even though the company's stock actually dropped 1.6%.
  • Occidental Petroleum's (NYSE: OXY  ) Ray Irani received a 39% pay hike to $31.4 million. Governance experts at the Corporate Library dub Occidental "a serial over-compensator" that sets performance targets the company is all but guaranteed to wallop.
  • Wells Fargo's (NYSE: WFC  ) John Stumpf made out pretty well, taking home $19 million despite the restrictions on TARP recipients' pay (which declined 34% overall). Interestingly enough, the Obama administration's compensation requirements for salary caps and long-term stock actually ended up handing Stumpf a lucrative stock-based windfall.

The road to reality
Business as usual may linger in some corners, but at least there are signs that CEO pay's undergoing a growing reality check.

In addition to shrinking pay, corporate governance watchers note that perks have decreased by 28%, to a median of $125,198. Perhaps companies and their boards have finally begun to grasp that shareholders are sick of paying for executives' absurd goodies. Country club memberships, private jet trips, and other luxuries should clearly be part of these already highly paid individuals' personal budgets. (Anybody who remembers Aaron's (NYSE: AAN  ) foray into NASCAR racing knows how preposterous perks can get.) These encouraging signs are a good start toward dialing back excessive CEO pay.

Though I truly believe merit deserves appropriate rewards, the oft-cited "free market" defense for high levels of CEO pay across the board doesn't work for me. A true free market shouldn't reward executives just for showing up, much less for abject failure. Highly paid CEOs who do not deliver healthy businesses and robust shareholder returns are a big waste of capital and a drag on profitability.

Let's keep our eyes on CEO pay, Fools. Short attention spans on this issue and many others are the enemies of solid business, good investments, and healthy portfolios.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance. 

Berkshire Hathaway is a Motley Fool Inside Value choice and a Motley Fool Stock Advisor recommendation. PepsiCo is a Motley Fool Income Investor pick. Motley Fool Options has recommended a "roll your diagonal call" position on PepsiCo. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (19)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2010, at 4:30 PM, ZZyzxZZ wrote:

    Check me on this, my memories are approximate: it all started when Warner Communication took over Atari about 1976. By 1982 Atari made so much money for Warner that it's Chairman, Stephen Ross, awarded himself about $22 Million in compensation. This was about 7 TIMES more than the largest US corporation (Exxon?) was paying it's CEO at the Time.

    Read about Mr. Ross in a book by Connie Bruck: MASTER of the GAME. You will see that he was something of a mobster who paid his board of directors handsomely rubber stamp whatever he did (which was to live like a king).

    I can see the other CEO's the 1980's watching with interest at what would happen to Mr. Ross. He did get indicted for various things, but not convicted. So he paved the way for the rest of them to begin looting their company's, something that has turned into an epidemic, helping to create a class of billionaires, each with handfuls of estates around the world, and hundreds of thousands of unemployed Americans living in the streets while (what used to be) their housed sit vacant gathering dust.

  • Report this Comment On April 07, 2010, at 4:44 PM, sapereaude1 wrote:

    No citizen of a Republic needs to make more than $1 million a year after taxes, unless he has personally invented and produced something that everyone wants to buy, and has done it without borrowing.

    These hyper-rich narcissists could find themselves dragged by vigilantes to a public place and terminated, along with their entire family genome. Similar things happened in France in 1789 and the years following, and in Russia in 1918, and in China in 1949. Don't expect the army to protect a self-absorbed plutocracy that puts its own interests ahead of the interests of the Republic.

  • Report this Comment On April 07, 2010, at 5:13 PM, PositiveMojo wrote:

    Alyce - this is an article worthy of Pravda and loyal socialists. You paint shareholders and workers as victims. Might I suggest that if you own a stock and believe that the CEO is overpaid, you can sell it. If you are a skilled worker who is productive, you can seek work with a better managed company.

    What would you say to a CEO like Alan Mulally of Ford ( which I own a substantial number of shares)? His $17 million payday was earned. Not only did he keep Ford out of bankruptcy but through his exceptional management they are flourishing with innovation and building a strong company as others disintegrate. He deserves the compensation he got and I enjoy my stock soaring over 300%.

    You claim free markets don't work - yet you do little to provide evidence of this claim. Exactly what has the government done in terms of regulating compensation that has been so effective? When you dig into the facts you'll discover more rhetoric than substance - and why is that? It's because free markets have resolved the problem. Many of the mismanaged companies are no more. The only ones that are surviving is not because the forces of the free market and creative destruction weren't in play, it was because government bureacrats stepped in and propped them up - artificially. So - who is to blame? Hmmm... I see the finger pointing at our government comrade.

  • Report this Comment On April 07, 2010, at 6:54 PM, djvalder wrote:

    "Now that we are officially in a recession" he says .... Excuse me aren't we officially "out of the recession" ? Have I been dreaming the DOW these last 6 months???

  • Report this Comment On April 07, 2010, at 7:44 PM, TMFLomax wrote:

    ZZyzxZZ, thanks for sharing the book recommendation. There does seem to be a fair amount of rubber stamping and looting going on. I believe the "superstar CEO" concept is relatively new. They are employees of the companies they run but that point seems to have been lost in recent history.

    Graybear1951, I never did say free markets don't work. However, I do think the "free market" argument for across the board high CEO pay that isn't tied to performance is rhetoric. There are plenty of indications that soaring levels of CEO compensation have been kind of rigged -- CEOs serving on one anothers' compensation committees and so forth. There are other problems too, like "peer groups" formed to come up with compensation policies where the companies included aren't really what logic would call peers, resulting in more ballooning pay.

    Sometimes economic reality does call for painful lay-offs, but when CEOs aren't willing to make similar sacrifices (when lay-offs show something's going or has gone wrong) and are preserving their pay, well that doesn't seem right either. And if such actions cause morale problems or customer ill will, if things stop working right because they've cut into the bone, well that's not a good long-term policy for the company.

    I never did mention Ford or complain about Mullally's pay. However, look what happened to GM. Between union demands and high pay for management despite ample and continued signs things were not going well for that company, well that did end up being a lose/lose situation when economic reality hit. Like I said, a waste of capital and destruction on profitability until the bitter end. I'm pretty sure everybody killed the goose; so much for the long term.

    I never said anything about regulation, but rather that we do need to keep an eye on these issues. I think the "anything goes, just sell your stock if you don't like it" mentality has not been good for shareholders' interests (and in some cases these days, not anybody else's either, other than those who got out with giant pay and huge golden parachutes for failure, etc.).

    Thanks for the feedback, folks.

    Alyce

  • Report this Comment On April 07, 2010, at 10:12 PM, xetn wrote:

    In a free society, one is supposed to be able to make whatever he is capable of making (legally). If a CEO is able to negotiate mega-millions for annual salary, good for him/her. If you disagree with this, vote with your feet. If you own the stock, sell it or short it. If you look at the annual reports and see the compensation of its top execs and don't like what you see, don't buy. Just stop preaching what you think is right and let each person decide what is in their own best interests. I did not subscribe to Motley to hear a bunch of stupid opinions about what you think is right or wrong. I am trying very hard to maximize my returns on investments (the same as the "overpaid" execs) and that is the purpose of my subscriptions. Please stick to the knitting.

  • Report this Comment On April 08, 2010, at 12:55 AM, PALH wrote:

    ``Might I suggest that if you own a stock and believe that the CEO is overpaid, you can sell it.''

    That'll show 'em!

  • Report this Comment On April 08, 2010, at 1:00 AM, dikrew wrote:

    As a former CEO, now retired, I have long opined that compensation comparisons for senior positions got out of line years ago (probably when compensation consultants started creating their "comparator groups" and began flogging their services to senior executives who then sold their Boards on the need for such services). People that virtually own the company (e.g., Paychex) or own the concepts behind their company's success (e.g., MicroSoft) should be able to command premium pay. People who work for a company at any level should receive a fair day's pay for a fair day's work. However, wages that are hundreds and sometimes thousands of times the average wage paid by that company are not a fair day's pay. Many of the performance targets for senior managers seem to be a joke. Our whole economic society needs to get back to a semblence of reality AND that reality has to start with our election of Directors for the Boards of the companies we own. Don't sell your shares: withhold your vote for those directors on Boards compensation committees where you disagree with their decisions!

  • Report this Comment On April 08, 2010, at 5:43 AM, PeterBradshaw wrote:

    The ratio of CEO pay to average worker's pay in around 1950 was something like 25 to 1. It is now more like 250 to 1. The ratio has risen rapidly since somewhere around 1980. There was a recent Bill Moyers Journal program with more details about this on PBS.

    Of course, those who consider Alyce's article a socialist rant have probably never heard of Bill Moyers, or ever watch PBS. Like the guillotine-fodder of 1789, and those forced to flee Russia in 1917, or panicked by the revolutions of 1848 in much of Europe, or loyalist to colonial Britain in 1776.

  • Report this Comment On April 08, 2010, at 7:12 AM, cummingsr wrote:

    Many corporate boards have been shirking in their oversight responsibilies...........and not just as regards CEO compensation. In our system of corporate governance, Directors are there to represent shareholder/owners and to monitor the overall game plan and execution carried out by management. An effective board is key in keeping a company out of serious trouble and in avoiding major blunders. Serious over payment of the CEO could qualify as a major blunder.......one which wastes corporate $$, hurts morale among employees, and indicates poor leadership.......so critical during hard times. WE HAVE TOO MANY GET ALONG, GO ALONG BOARDS! The answer is not for owners to sell out. Rather, shareholders...and especially institutional shareholder must let their voices be heard and their votes count!

  • Report this Comment On April 08, 2010, at 9:43 PM, extremist wrote:

    Why single out CEOs? Other executives and managers "earn" millions as well, as do various other entitled castes in our society. Most have been amassing pelf for years and have more than enough to retire with untold riches. You can't have your cake and smoke it, too.

  • Report this Comment On April 09, 2010, at 1:49 PM, PositiveMojo wrote:

    @PeterBradshaw

    Interesting comment about the "guillotine fodder". Are you suggesting that Americans will drag the CEO's to the guillotine for beheading? Gee - and here I thought we lived in a free country and under the rule of law.

    BTW - the revolts you cite were against the "government". We saw a bit of rebellion in Massachusetts in the election of Scott Brown. Personally - I'm glad we have a two party system because it's the only thing that keeps the ones with the real power under control.

    As a foolish investor - my focus is not on how much the CEO gets paid. It is on the results the company is achieving. If they don't produce - I don't invest - period!

    Worrying about CEO pay is a tempest in a teapot. The real problem is with mismanagement in Washington.

  • Report this Comment On April 14, 2010, at 2:55 PM, Atrossity wrote:

    I am dismayed at comments that indicate investors believe that if a CEO and his Board are in collusion, it's just fine and seem to believe this corruption is acceptable. Then conclude the author is, a Marxist calling to seize the means of production, because they are against corruption. Intolerance of corruption equals a political ideology? If you folks actually believe what you are saying, it chills me.

  • Report this Comment On April 14, 2010, at 2:55 PM, Atrossity wrote:

    I am dismayed at comments that indicate investors believe that if a CEO and his Board are in collusion, it's just fine and seem to believe this corruption is acceptable. Then conclude the author is, a Marxist calling to seize the means of production, because they are against corruption. Intolerance of corruption equals a political ideology? If you folks actually believe what you are saying, it chills me.

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