Investors and the general public have two significant developments involving CEO pay to consider right now. One of them is the stuff of overpaid CEOs' nightmares; outraged corporate representatives have kicked, screamed, and decried its onerous nature. Sadly, some politicians have fought it as well, reinforcing their perceived disinterest in shareholder rights and merit-based pay in a supposedly market-driven country.
First, the Securities & Exchange Commission is finally coming closer to following Dodd-Frank demands for certain financial reforms -- right now, we should be focused on the long-delayed disclosure of public companies' mandated disclosure of their own CEO-to-average-worker pay ratio. Its proposed rule is expected to take effect next month.
Second, the Institution for Policy Studies has released its annual "Executive Excess" report, which covers an astounding 20 years of outrageous CEO pay focused on execs who have been bailed out, fired, or found to be presiding over corporate periods marked by fraudulent behavior.
Triple "B"s mean bad news for chief executives
The IPS report, with key findings (link opens PDF), crunches 20 years of data about excesses in CEO pay. The report is chock-full of important information; there's so much data that it had to limit its analysis to "Bailed Out, Booted, Busted" CEOs who have been lavishly paid.
Suffice it to say that these pay packages fall well short of market-based standards.
- Chief executives of financial companies that were bailed out during the financial crisis took 22% of the slots in the report's long-term sample.
- CEOs who ended up fired -- well, we all know that boards of directors generally allow them to resign so they don't have to sacrifice their golden parachutes -- made up 8% of the sample. On average, they bowed out (dis)gracefully with $48 million in exit payouts.
- Corporate leaders whose companies had to pay major fraud-related settlements and fines during their tenures comprised another 8% of the sample. The companies in question each paid out more than $100 million.
Many of the corporate leaders IPS highlights are among the most well-known -- in some cases because they are frequent denizens of top-paid CEOs lists.
Oracle's Larry Ellison has name recognition for many reasons, including his tendency to show up on lists like these. Over the 20-year time frame, he is among the CEOs who have raked in more than $1 billion in inflation-adjusted compensation. In Ellison's case, the total is $1.8 billion. Note that Ellison has made the list of 25 top-paid CEOs 10 times, and yet during his time at the helm the company has been charged with fraud charges including insider trading.
Disney's retired Michael Eisner is another well-known chief executive, and he is also at the top of what IPS dubs "the $1 Billion Club." His pay totaled $1.4 billion.
Sanford Weill, who headed up Travelers and Citigroup over the years, took home $1.5 billion.
"Slight" pay discrepancies
Disclosure of specific CEO-to-worker pay ratios should most certainly strike fear into the hearts of many chief executives. It's also a metric that investors should watch closely.
This major transparency will also help us spot the more management-centric firms that likely tread upon employee morale, slash workforces, cut the wrong expenses (CEO pay can be a great cost-cutting measure when companies are in trouble, but that's rarely the case), and otherwise attract greedy leaders, rather than great ones.
IPS crunched some data on the above CEOs, and some of the results are shocking.
Assuming Ellison toiled 60 hours per week, his average pay would come out to nearly $30,000 an hour over a 20-year period. That's 2,322 times the median pay of working Americans.
It seems amazing that someone could make 5,000 times the federal minimum wage -- yet IPS calculates that Eisner did just that. According to the report, he brought in about $34,000 for each hour worked during his tenure from 1993 to 2005.
Throughout Weill's 13 years in the corner office, IPS calculations show he made about $36,000 per hour.
The search of greatness, not greed
Many investors respect famed management consultant Peter Drucker, but they forget some of his insights regarding suboptimal management styles. IPS included one of my favorite Drucker insights in the report, along with another important idea: "Management guru Peter Drucker believed that the ratio of pay between worker and executive can run no higher than 20-to-1 without damaging company morale and productivity. Researchers have documented that Information-Age enterprises operate more effectively when they tap into -- and reward -- the creative contributions of employees at all levels."
Sadly enough -- and not surprisingly -- the SEC's rule has been tweaked to pull some teeth from the disclosure. According to The Wall Street Journal, public companies won't have to disclose pay ratios in relationship to their entire workforces. It's not even clear yet what factors will put some employees in the sample but not others. (One can only imagine that some internationally outsourced employees might not make the grade.)
Many of us can guess who lobbied vociferously for watered-down rules. This transparency has the power to expose managements and boards of directors that haven't done well for their companies over the long term. Worse, many have taken advantage of things like tax loopholes, traders' short memories and short-term performance goals, and even their own firings, too often defined as "retirements" so that they always win.
Certain corporations' and politicians' efforts to block reforms like this expose their disrespect for shareholder rights and even shareholders themselves. It's high time the SEC moved the demand for this data forward. These ratios will help shareholders separate the great from the greedy when it comes to corporate leaders.
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Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Citigroup, Oracle, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. 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.