In the wake of Bob Nardelli's departure from Home Depot
A certain crescendo was reached in 2003, when Dick Grasso was ousted from the New York Stock Exchange
For example, Nardelli demanded guaranteed bonuses and was granted them. Now, many people rightly agree that focusing on the short-term stock price leads to myopic decisions that could have long-term implications. Yet in Nardelli's case, he was guaranteeing that he personally succeeded even if shareholders didn't. But it was the board that agreed to this package and should be made to answer.
There are a few reasons why compensation packages can get out of whack:
A clubhouse mentality. There's a bit too much chumminess on these boards. CEOs are often the ones who recruit directors, who in turn are expected to vote impartially on compensation. In Home Depot's case, Nardelli's buddy Kenneth Langone not only lured Nardelli to Home Depot but was instrumental in the pay deal. He also sat on the board of the New York Stock Exchange and was in the thick of the Grasso pay dispute. Interestingly, Grasso also served on the Home Depot board when Nardelli was brought on board.
Reliance upon consultants. By letting an independent third party determine what an appropriate compensation package is worth, boards of directors are given a shield to hide behind in case it blows up.
- Everyone else is getting it. For a company to be held in high regard by its peers, its executives need to be well-compensated, too. That's why most proxy statements discussing executive pay say they survey other companies in the field, and in order to "attract and retain" their executives, they have to pay them a commensurate amount. It's a nice self-serving attitude, but shareholders should not stand for it.
On the other end of the pay spectrum are executives like Steve Jobs at Apple
Not a worker's paradise
In comparison to some outlandish corporate pay packages, employee salary increases barely cover cost-of-living increases. Union workers are particularly under the gun to give up previously negotiated salary increases. While more highly compensated than the average non-union worker, these people aren't living in the lap of luxury either.
In the strike at Goodyear's
Most executives should be well-compensated for running a good business. Doing so increases goods, services, jobs, and shareholder wealth. But the stark reality is that some executives look at a company as a personal fiefdom and shareholder wealth as a personal piggy bank.
According to the Corporate Library, the average CEO of an S&P 500 firm made more than $13.5 million in 2005, a 16.4% increase over the year before. While that's certainly no small amount, it's in the area of retirement packages that Executive PayWatch, an AFL-CIO site, says some of the greatest wealth is being transferred from workers and shareholders to executives. Lee Raymond of ExxonMobil
Foolish final thoughts
The worst possible solution would be for Congress to step in to try and correct this problem. It was lawmakers' meddling with CEO pay the last time that led to the phenomenon of gorging on stock options, which is only just coming home to roost. Call it yet another example of the law of unintended consequences.
Boards of directors need to take more seriously their fiduciary responsibility to shareholders. Pay executives well, but make sure they're getting the job done. The other half of the equation is that shareholders need to take their responsibility as part owners of the company more seriously than they do.
Do most shareholders read the financial statements put out by companies? Do they read the proxy statements mailed out every year detailing the pay practices of their companies? Do they vote their shares against directors who reward management for mediocre behavior? I would hazard a guess that the answer to those questions is a resounding no.
Excessive severance sweetheart deals like Nardelli's can be useful, though. They mean that at least once every few years, shareholders must realize that these are actually businesses that they own -- and that the money being given away is theirs.