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Finding the Real Fault in CEO Pay

Alyce Lomax
September 23, 2011

Yesterday, we mulled investor-centric topics at The Motley Fool's 2011 Investing Conference. Although the agenda was chock-full of thought-provoking speakers, one of the most inspiring was Nell Minow, GovernanceMetrics International board member and BNET columnist, whom BusinessWeek has dubbed "the queen of good corporate governance."

Minow sounded the challenge on one area where even we Fools too often fall short: calling out the real culprits enabling egregious CEO pay and low levels of operational performance.

Companies' boards of directors, particularly compensation committees, are the core problem, and these enablers rarely take heat for their considerable share of the fault.

Perfect timing!
As we pondered hardcore investing topics, Hewlett-Packard (NYSE: HPQ  ) was announcing big news. It's replacing current (and extremely short-tenured) CEO Leo Apotheker with former eBay (Nasdaq: EBAY  ) chief Meg Whitman -- who, incidentally, has a seat on HP's board.

HP has been a mess for ages now; the shameful Mark Hurd debacle last year is just one example. Minow described HP's board as "the gang that can't shoot straight" -- a serial offender in the realm of shoddy corporate governance.

Goodness only knows what kind of employment agreement Hewlett-Packard's compensation committee has crafted for incoming CEO Whitman before even proving her mettle. Although Whitman's name shines with popular recognition, can she really turn HP around? It's a totally different corporate animal from eBay, and one with far less promise than the online auctioneer had when she came on board.

Shareholders have good reason to worry. Mark Hurd was first rewarded for his ethics violation with a golden parachute valued at about $40 million; he then laughed all the way to the bank, immediately landing a lucrative position at Oracle (Nasdaq: ORCL  ) . (The payout was reduced all the way down to $35 million when HP questioned whether Hurd's move to Oracle was legal following his ouster.)

HP's board had written bizarre benefits into Hurd's contract from the very beginning; Minow pointed out that Hurd's first-year goals were deemed already met upon hiring.

When Whitman's employment agreement is filed, it should make interesting reading. Hopefully HP's board won't prove that it can outdo itself on outrageous pay plans.

Name-calling where it's due
Minow's affiliated firm, GMI, quickly posted about HP's history of big-time bumbling. As much as Whitman's monetary greeting could prove unpleasant, Apotheker's 11-month tenure could include a hefty price for very little performance.

As GMI's Paul Hodgson noted, "Whether it's golden hellos or golden parachutes, HP has a certain history of overpaying its serial CEOs."

Given that history, let's dig up some names and call them out. As of HP's latest proxy statement, its compensation committee consists of Lawrence T. Babbio Jr., Rajiv L. Gupta, John H. Hammergren, Joel Z. Hyatt, and Lucille S. Salhany.

Lest we forget, w