Why Greedy CEOs May Be Terrified Right Now

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.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (26) | Recommend This Article (42)

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  • Report this Comment On August 28, 2013, at 4:21 PM, devoish wrote:

    I'll give you the first rec for this post, but soon the freedom to steal marketeers will be on you.

    Best wishes,

    Steven

  • Report this Comment On August 28, 2013, at 6:30 PM, SpaceVegetable wrote:

    Being overpaid does not necessarily mean the individual is greedy. The board makes the decision to pay, after all. If people don't like what a CEO is paid, they should buy shares and put a resolution to the board and shareholders. Otherwise, it's no one else's business. I don't know why so many people seem to think others' income or financial affairs are any of their business. As long as it's legal, people should worry about their own affairs.

  • Report this Comment On August 28, 2013, at 7:39 PM, CHill8008 wrote:

    Can you explain what "market-based standards" are, and how the pay packages "fall short" of them?

  • Report this Comment On August 28, 2013, at 8:16 PM, yaovk wrote:

    the sick republicans want to give them more tax breaks. shame on them. ceos' bonuses must be taxex heavily after a reasonable thresholx.

  • Report this Comment On August 28, 2013, at 8:29 PM, Risky88 wrote:

    The only reason any of them would be scared is if they actually went to REAL Prison.

    which is 5000 to 1 chance

    not so scary or is it..........

  • Report this Comment On August 28, 2013, at 9:00 PM, lm1b2 wrote:

    The public has known about the huge amounts of money these Greedy do nothings make for some time,what bothers Me is the Stockholders allow this outrageous greed to go on. This money comes out of their profits,and they say,and do nothing,thats the part that is unbelievable,nobody is worth the kind of money these fools make !

  • Report this Comment On August 29, 2013, at 1:04 PM, whyaduck1128 wrote:

    As much as I loathe him as a person, Alec Baldwin had it right when he called Michael Eisner "the eighth dwarf, Greedy".

    How much is enough for these people?

  • Report this Comment On August 30, 2013, at 11:53 AM, TMFLomax wrote:

    Thanks for the thoughts everyone.

    Steven/Devoish: "The freedom to steal marketeers" -- haha. I'm surprised I haven't seen more of 'em here. My bet is that they are on vacation.

    SpaceVegetable (nice handle):

    This is definitely also about boards of directors. I could probably have written another 1000 words about the cozy relationships directors have with one another, how many of them are CEOs at other companies, board interlocks, etc. and so forth. Directors are also accountable (and actually more so, since they are *supposed* to be looking after shareholder interests, not their own and one another's). Shareholders deserve more power in voting them in AND out. This system actually doesn't work in favor of shareholders, and it's not market-based compensation when the deck is stacked like this. (Part of this article is definitely about how much we often pay for non-performance, which of course is not part of a merit- or market-based system.)

    whyaduck1128:

    "The eighth dwarf, Greedy" -- that is really clever, haha.

    Speaking of "how much is enough," there is a wonderful book by investing legend Jack Bogle called, as luck would have it, "Enough." There is a sense that nothing is EVER enough amongst a certain part of the managerial class in corporate America (well, in other parts of America too, but this article is about the former) -- if you haven't read it, it's a great book and I highly recommend it.

    Thanks everyone for the thoughts.

    Alyce

  • Report this Comment On August 30, 2013, at 12:39 PM, hbofbyu wrote:

    @spacevegetable

    "Being a dictator does not necessarily mean the individual is lustful for power. The worker's party makes the decision to give that power, after all. If people don't like what Kim Jong-un does, they should put a resolution to the party. Otherwise, it's no one else's business. I don't know why so many people seem to think others' lust for power or financial affairs are any of their business. As long as it's legal, people should worry about their own affairs."

    It's no one's business in a public company?

  • Report this Comment On August 30, 2013, at 5:49 PM, theomaximus wrote:

    In a more perfect world, excessive executive pay and stock options would be called sanctioned embezzlement.

  • Report this Comment On August 30, 2013, at 8:41 PM, Kiffit wrote:

    Nice work Alyce. Over the last 30 years, I have heard a steady mantra coming out of 'corporateland' about the infallibility of the market.

    The GFC does not seem to have done anything to blunt this blithe assumption. This article only serves to underline how little has been learned about the fallibility of markets, or pricked the bubble of 'corporatethink', even when it blatantly undermines the interests of investors.

  • Report this Comment On August 30, 2013, at 8:54 PM, cozzawk wrote:

    Am I missing something? If you think a CEO of a company is improperly compensated and you can't affect that, why are you even thinking about investing in that company?

  • Report this Comment On August 30, 2013, at 10:07 PM, colleran wrote:

    I can't imagine anything is going to happen unless large shareholders like pension plans and funds make an issue of it.

  • Report this Comment On August 30, 2013, at 11:10 PM, mountain8 wrote:

    " I don't know why so many people seem to think others' income or financial affairs are any of their business. As long as it's legal, people should worry about their own affairs."

    When my hard earned money is used to pay their ungodly paychecks, It's my affair. What are you? A broker?

  • Report this Comment On August 30, 2013, at 11:15 PM, mountain8 wrote:

    the citizens that don't like what Kim Jong-un does usually end up dead along with their whole family. Why should they complain about anything to anyone? Be a realist. Not stupid.

  • Report this Comment On August 30, 2013, at 11:18 PM, mountain8 wrote:

    Dear space veggie,

    You obviously were part of the political system in the "formerly" great Soviet Union. Or just stupid.

  • Report this Comment On August 30, 2013, at 11:23 PM, mountain8 wrote:

    cozzawk , Well, if I'm making a good return I have few problems other than one person making more than the American budget of most states. If the directors bankrupt me, or commit fraud or lie, I'd just as soon see them publically skinned and gutted, and their heads hung on a bridge. It's happened before.

  • Report this Comment On August 31, 2013, at 12:42 AM, CHill8008 wrote:

    And still no "market based standards." Plenty of Lomax-based standards. One Drucker-based standard. A reference to a Bogle-based standard in the comments.

    While the author seems to advocate such "market-based standards", Kiffit points out the inherit fallibility of such standards.

  • Report this Comment On August 31, 2013, at 9:11 PM, Jurobi wrote:

    Yaovk, I would like to point out that most of these CEOs were strong financial supporters of Obama and the Democratic party as a whole in the past two presidential elections.

  • Report this Comment On September 01, 2013, at 8:46 AM, xponey wrote:

    Work for major home improvement big box store, last two years cut out sales spiffs and reduced contractors discounts by half, so CEO could receive 12 and 1/2 million dollar bonus above yearly salary.........obscene when compared to the associates yearly pay...the ones that actually make it happen.

  • Report this Comment On September 01, 2013, at 5:31 PM, lowmaple wrote:

    Let's face it. Most of us are in it for the money. As long as we see the CEOs save more for the company than their enormous wages most don't care about the rest. But if the Long term stock price goes down then claw backs are in order.

  • Report this Comment On September 03, 2013, at 6:04 PM, Clint35 wrote:

    I can back up that study with one name Bob Nardelli. He wrecked Home Depot and got paid $200M for it. According to Jim Cramer. Another very good article Alyce.

  • Report this Comment On September 04, 2013, at 8:34 AM, TMFLomax wrote:

    Yes Clint35, Nardelli/Home Depot is a great example of pay for failure. Maybe one of the best, in fact. That one was rather mind-boggling!

    Alyce

  • Report this Comment On September 04, 2013, at 8:47 AM, Misha888 wrote:

    When Government regulations distort and corrupt the market place, the same people who created the original regulations demand even more regulation of the market place, to correct the imbalances the original regulations have created.

  • Report this Comment On September 04, 2013, at 10:30 AM, deckdawg wrote:

    Alec Baldwin calling Eisner greedy? That's rich. Ever wonder how much Baldwin gets paid as a huckster for one of our largest greedy, vicious, predatory credit card companies? What's in your wallet? Baldwin wants a cut of whatever is there. What's the ratio of Baldwin's pay to, say one of the cameramen, on the 30 Rock show? Baldwin pontificating on greed ... who can possibly take the hypocrite seriously?

  • Report this Comment On September 04, 2013, at 11:55 AM, retailfx wrote:

    I am surprised that some one can earn $7396 in 4 weeks on the internet. did you read this page: baz4.com

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