Watchful Eyes on Wasteful Practices

Corporate executives enjoyed a very lucrative 2010. In its 2011 edition of Executive PayWatch, released earlier this week, the AFL-CIO highlighted the state of CEO pay for the previous year.

According to the AFL-CIO's data on 299 S&P 500 companies, CEO pay averaged almost $11.4 million in 2010, representing a 23% increase over last year. Combined pay for these companies' CEOs totaled $3.4 billion in that time frame.

The AFL-CIO has long kept an eye on the major pay disparity between CEOs and the average worker. In 1980, CEOs made, on average, 42 times the money the average worker did. In 2000, that compensation gap had skyrocketed to 525 times.

That pay differential fell to 343 times the average worker's wage last year, but even that gap represents an astronomical disparity with a disappointing conclusion. The harrowing financial crisis has apparently failed to knock any fiscal sense into corporate America's upper echelons, even while the economy struggles to recover and many American workers remain unemployed or underemployed.

Parting is such sweet sorrow -- at least for CEOs
The AFL-CIO's report called out several corporate "case studies" to consider. As proxy season progresses, we'll surely see many more.

One particularly galling example involves beleaguered drugstore chain Rite Aid (NYSE: RAD  ) . As longtime investors know only too well, Rite Aid hasn't produced an annual profit since the fiscal year that ended in March 2007. It's also got a chilling $6.1 billion in long-term debt and just $91 million in cash on its balance sheet.

This company's chances of thriving, even surviving, look slim. Drugstore chain rivals like CVS Caremark (NYSE: CVS  ) and Walgreen (NYSE: WAG  ) have proven formidable contenders, while grocers and huge discounters such as Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) also provide pharmacy services and peddle similar items. At this point, many folks think a takeover may be Rite Aid's best, if not only, outcome.

But though management has failed to conquer any of this company's longstanding problems, Rite Aid's former CEO and current Chairwoman Mary Sammons still enjoys a pretty sweet deal. Sammons stepped down as CEO last year, having headed up the company since June 2003, a time frame in which Rite Aid's share price dropped 80%. Nonetheless, Sammons received $3.2 million in compensation in 2010 -- even though she vacated the CEO position in June.

Furthermore, Sammons will still receive a $750,000 base salary and the possibility of a $1.5 million bonus in her continuing role heading Rite Aid's board of directors. Worse yet, her golden parachute pretty much guarantees that she'll do fine, whatever befalls Rite Aid. If she departs following a change of control, her severance benefits include $9 million in cash, as well as more than $1 million in health benefits, supplemental pension benefits, and stock options and restricted stock.

Another interesting case study involved William Pulte, the former chairman of PulteGroup (NYSE: PHM  ) . Although he retired from the chairman role in February 2010, the company has kept him on as a consultant, paying him a $3.3 million lump sum and promising $1.5 million more to work as a consultant for no more than 300 hours a year.

The AFL-CIO pointed out that the construction industry has taken a huge hit in the aftermath of the housing bust. So has PulteGroup's stock price, which has fallen 75%. However, if you're a high-ranking executive, apparently you can still land a sweet gig making $5,000 an hour.

Paying for failure: a self-fulfilling prophecy
Clearly, even the end of a disastrous tenure for some underperforming corporate leaders includes outsized rewards. Such cases should enrage shareholders -- or anyone with a basic sense of decency. Investors must realize that this issue isn't even just about plunging stock prices and ruined investments. It's also about the massive amount of their money getting plowed into the pockets of folks who not only haven't helped a business's prospects, but have also sometimes steered their companies into trouble.

The AFL-CIO is yet another voice reminding shareholders that outrageous disconnects still exist, and that shareholders can use their new "say on pay" privileges to voice dissatisfaction with such companies' policies when they vote their proxies this year. (The union also pointed out that the Dodd-Frank Act's coming mandate that companies disclose pay disparity data between corporate CEOs and their median employees will offer another very eye-opening data point.)

Needless to say, many investors won't agree with the AFL-CIO on all issues pertaining to public companies, but this particular topic is a logical and rational place to find common ground. Outrageous pay for underperforming CEOs wastes financial resources that could be better directed elsewhere. Investors who condone lavish pay for failure run a major risk of dooming their portfolios to similarly dire outcomes.

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

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Alyce Lomax does not own shares of any of the companies mentioned; for more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. 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 Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

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 22, 2011, at 7:43 AM, lemoneater wrote:

    Wow, no wonder why Rite Aid is struggling.

    Have a Happy Easter!

  • Report this Comment On April 24, 2011, at 3:52 AM, globalsailor wrote:

    Who cares about say on pay? If you don't like the way the executive is compensated then sell the stock!

    I think that CEO's are paid more than the average worker because of technology and unionization. Unions deliberately do things to make workers less productive (see those list of things that employees are not allowed to do because they are not in the job description) so that the company won't discover the need to fire half of them because of a technological innovation. Thus the workers all make less money because the employee budget pie has to be split up between more workers. On the other end, lots of technology allows executives to be more productive, reduce the amount of required management. This extra savings goes into their pockets.

    And yes chances are that the companies that improperly compensate their executives will run into more and more financial troubles, so as long as they can fail properly, I'm not worried.

  • Report this Comment On April 29, 2011, at 4:36 AM, littledinghy wrote:

    Mr. globalsailor,

    sounds like you must be sailing your 90 ft yacht around the world from the money you stole from the company you worked for. Many a times its the investor who keep these companies afloat for years with all the the false promises from its fraudulant ceo's and board members, legal but fraudulent non the less. Laws do need to change they should be held accountable along with their severance, pensions, stock options, etc. oh yea sure, you say you dont like the way execs run things, sell your stock eat your lunch and take your hit at a buck a share while this witch and her cronnies walk away with bucu bucks.Next time you go sailing hope you get a hole in your boat and it sinks along with all your retirement savings. oh yea and you with it.

  • Report this Comment On May 03, 2011, at 2:25 PM, ctyank99 wrote:

    Rite Aid had four out of five months with same store sales gains. Way to go Rite Aid. Keep it up!

  • Report this Comment On May 03, 2011, at 2:27 PM, ctyank99 wrote:

    To all of you that own Rite Aid, be sure to shop there. If every shareholder shopped at Rite Aid, it would help!

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