This Change Isn't Chump Change

Change is often good, especially when it applies to corporate America's approach to CEO pay. The fat paychecks corporate leaders cash rarely reflect their true performance, and too often end up wasting shareholder capital. Thankfully, fed-up shareholders are slowly but surely making headway in pushing for much-needed adjustments in how CEOs get paid.

A spark of change
Corporate governance experts and activist shareholders recently got attention at Occidental Petroleum (NYSE: OXY  ) . That company hit the radar long ago, thanks to Chairman and CEO Ray Irani's years of super-lucrative pay. Corporate governance experts at The Corporate Library even dubbed Occidental Petroleum a "serial overcompensator."

This past year, Occidental shareholders rallied for change with a no-confidence vote on the company's pay practices. Institutional activist investors Relational Investors LLC and the California State Teachers' Retirement System (CalSTRS) later announced their intention to attempt to jettison at least four of Occidental's 13 board members.

That shareholder agitation has made a difference. Irani will keep his chairman spot, but step down from his CEO post at the 2011 annual meeting, and compensation for him and his CEO successor Stephen Chazen will diminish.

The Corporate Library provided additional color on the new compensation plan. It's not all great news for shareholders, but it's a start toward reining in Occidental's pay policies; the organization gave Occidental a score of 6 out of 10 for the effort.

Maybe this is just the beginning.

Time for an attitude adjustment
Executive compensation sorely needs a serious shakeup. In 2009, average CEO pay was 263 times that of the average U.S. worker. Although that improved from the 319-to-1 ratio in 2008, it's still high when you consider that the U.S. remained in the throes of economic distress.

Recent data from the Institute for Policy Studies pointed out another disturbing trend during our prolonged "Great Recession." So-called "layoff leader" companies, which let go of huge numbers of U.S. workers, tended to have the most highly paid CEOs. Such companies included Caterpillar (NYSE: CAT  ) , Boeing (NYSE: BA  ) , and Las Vegas Sands (NYSE: LVS  ) .

Even this far into the global economic doldrums, layoffs like those continue. Just last week, major companies Xerox (NYSE: XRX  ) and Nokia (NYSE: NOK  ) announced coming job cuts.

Pockets of problems
Despite signs that some companies are getting the message, shareholder abuse on the CEO compensation front continues. Shareholders must remain vigilant about their companies' pay policies.

For example, First Marblehead (NYSE: FMD  ) recently awarded CEO Daniel Meyers a $2 million "special bonus," even though the company reported anemic revenue and a $145 million net loss for the year.

The special windfall was intended to reward Meyers for "improving the viability of the company" through cost-saving measures. But paying Meyers extra $2 million for cutting worker pay (among other measures) probably didn't go over too well with the actual workers, and shouldn't win praise from shareholders, either. If the rank and file endures pay cuts in tough times, the head honchos shouldn't collect millions in surprise rewards.

Such behavior isn't an anomaly, either. Boston Scientific CEO J. Raymond Elliott didn't even have a full year's tenure in his position, yet he still received a $1.5 million bonus -- even though Boston Scientific lost $1 billion last year.

Change in the pocket for shareholders
CEO compensation is just another corporate expense, and if a business's leaders aren't performing in a manner that merits their hefty pay, shareholders are getting the shaft. If you own stock in a business like this, you literally can't afford to be apathetic.

Thankfully, shareholder activists are gaining attention and ground. The greater number of people aware of and acting on problems like these may spur more and more companies to change the often illogical ways they dole out pay to top brass. That would be a good change -- and definitely not chump change -- for shareholder returns.

Nokia is a Motley Fool Inside Value recommendation. The Fool has established a bear put spread position on Caterpillar. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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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 October 27, 2010, at 4:23 PM, dmawhinney wrote:

    Quite frankly, as a shareholder of both CAT and BA among many other companies, I'm pleased that they are willing to manage their resources for the long term viability of their companies by "rationalizing" the amounts of labor and capital in steering a profitable course. The CEO has many masters - customers, vendors, product quality and development, employees and shareholders. I will gladly pay a CEO that has the balls to downsize their labor force in the face of diminished economic activity so that the company can remain viable and profitable. Maybe the CEOs of GM and Chrysler should have been more aggressive in "rationalizing" their labor forces several decades ago.

  • Report this Comment On October 27, 2010, at 6:25 PM, PeyDaFool wrote:

    dmawhinney,

    I wholeheartedly agree with you except I'll take it one step further and say I'd even whack my own dear mother if it netted me a few hundred dollars.

    Down with equality, down with positive morale! Up with CEO compensations, pensions and up with rationalization! Let's make sure every CEO makes at least 4000 times what everyone else makes!

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