Corporate Boards clueless on CEO pay

Cthippo · 1 Feb 2007

Associated Press said:

NEW YORK - Shareholders worried about runaway executive pay are likely to be stunned by the findings of a new study that shows many board directors still have no idea how much their CEOs would collect if they retire, are fired or bought out.

Board members also acknowledge they are struggling to rein in bloated executive compensation, but are counting on investors to lead the cause to knock it down.

Those conclusions aren't a decade old, but are part of a recent survey from the consulting firm PricewaterhouseCoopers and the Corporate Board Member magazine, which culled responses of more than 1,300 directors at U.S. companies. Its bottom line: Directors still don't have as much control over corporate dealings that many believe is needed to curb super-sized compensation.

This truly is shocking. Directors' primary duty is to represent the interests of shareholders, and it's fair and logical to expect them to take charge more directly following the rash of corporate scandals in recent years.

But the dynamic in the boardroom is far from perfect. While more boards are independent of management, there are still plenty of cases of directors using flawed judgment or kowtowing to demanding executives who are pushing their own agendas.

The list of such behavior runs long. As the housing market swooned, the board at mortgage lender Countrywide Financial Corp. gave the CEO $10 million in retirement pay even though he wasn't retiring. Directors at Caremark Rx Inc. approved a takeover by CVS Corp. that will give them job security and provide some with severance payouts. Boards have rubber-stamped incentive pay for executives even when stock or earnings performance has lagged.

Shareholders are often left wondering how such things could go on. This new study gives some telling insight.

Part of the problem, it seems, is that boards are still controlled by CEOs, with 50 percent of directors surveyed saying that board leadership flows from the company's top executive who is also board chairman. Those individuals, therefore, set the agenda as well as the flow of information at board meetings and among members.

More surprising is that directors don't want that to change — even though there has been a push throughout corporate America to have an independent board chairman at the helm. Only 8 percent of directors say that they would like more boardroom control and 59 percent say that they don't want the chairman position to be an independent director.

When asked what would be the worst position that a board could find itself in, only 4 percent said that it would be giving an executive a $10 million bonus even though the stock price is lower for the second year in a row. Nearly a third thought investigations over insider trading would put them in a more compromised spot, while 27 percent said losing the CEO without a succession plan.

In the area of compensation, two-thirds of responding directors believe that U.S. company boards are having trouble controlling pay. Separately, a third believe that stockholders are the group most likely to get pay pared down.

But it is hard to reduce pay when the directors themselves don't know how much they've even agreed to pay executives. Less than half of those surveyed said their boards use tally sheets to add up total compensation, and about one in five directors said that they didn't know what the CEO would collect if he or she is terminated, retires or should there be a change in control.

Such findings help explain how boards often find themselves in the hotseat. The directors at Home Depot Inc. learned that the hard way.

They faced intense criticism in recent years for paying former CEO Robert Nardelli about $25 million a year in compensation, excluding the potential value of stock options. He got that even though the home-improvement retailer's stock price lagged during his six-year tenure. And when the furor over his pay led to his departure in early January, his severance totaled $210 million.

With their actions now under a microscope, they were far less generous with his successor. New CEO Frank Blake could earn as much as $8.9 million a year in total compensation. He will received a base salary of $975,000 and will get the rest if he meets the board's stock and earnings performance goals. In addition, Blake's compensation arrangement does not provide for payment of severance upon termination.

Home Depot's board made such changes because it was up against a wall. Other directors have yet to see such urgency, to the detriment of every shareholder they represent.
Click to expand...

Here's a little bit of how the rich get richer and the poor get bent over.

Techno-Dann · 1 Feb 2007

I think one simple rule would solve the problem very quickly: The highest payed employee of the company can receive no more than, say, 50x the amount the least payed employee makes, averaging out wages and other compensation for a year on an hours-worked basis.

Cthippo · 1 Feb 2007

Or how about a law that says the CEO cannot also be chairman of the board and must be subordinate to the board? I think one of the lessons of the human expierience is that people are less inclined to do the right thing if they don't have someone holding them accountable.

Constructacon · 1 Feb 2007

I'm disgusted by how much CEOs earn. My partner works for a large insurance company here and come last bonus time, because the "company hadn't performed as well as expected" her bonus came to about 3-4% of her annual salary ($40k). Meanwhile the CEO with his $4million annual salary (+ house + travel +++) took home a bonus worth about 110% of his salary. I'm still bitter over it. Did I mention that this was a half yearly bonus??

As Cthippo says, the CEO should answer to the board. Who knows - maybe the board should answer the the employees too (in a utopian society perhaps).

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Corporate Boards clueless on CEO pay

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Corporate Boards clueless on CEO pay

Cthippo Can't mod my way out of a paper bag

Techno-Dann Disgruntled kumquat

Cthippo Can't mod my way out of a paper bag

Constructacon Constructing since 1978

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