Friday, December 15th 2017

Leadership: Do CEOs Deserve So Much Loot?

January 30th, 2012 in Leadership by

I’m a little worried that CEO pay, particularly exorbitant bonuses, is getting out of hand. I recently read a report that Walt Disney CEO Robert Iger received $31.4 million in pay and perks in 2011. Uh, are you kidding me? $31 million! And, he drew another $21.4 million from exercising previously awarded stock options and shares that had vested. Iger wasn’t alone. Several other corporate leaders have gotten revoltingly richer recently.

Apple’s Tim Cook landed a whopping $378 million, including $376 million in restricted stock after replacing the late Steve Jobs. Starbucks’ Howard Schultz was paid more than $65 million in fiscal 2011, including salary, bonuses and stock options. Tyco’s Ed Breen reaped $68.9 million, including stock and option gains worth $52.4 million. And the list goes on.

As they say on ESPN’s NFL pre-game show, “C’mon, man!” While CEOs continue to enjoy big payouts, median household income for the rest of the population has reached its lowest level since 1996, slipping to $49,445.

Now, I get that Iger did a really good job. And Apple has been kicking, well, a lot of mobile technology butt. I’m aware how hard these executives work and the responsibility that is on their shoulders. I understand that shareholders have benefited from the increased value driven by Disney’s and Apple’s performance. Disney’s directors have cited Iger’s role in leading the entertainment giant through a “persistent difficult economic environment, during which the company posted record revenue and earnings per share.”

So, I’m not suggesting that certain CEOs don’t deserve a bonus—even big ones. But companies need to be more sensitive to disparities in income distribution. Did all of Disney’s workers get an equivalent spike in pay? Did every deserving employee that made Apple’s Cook look good get a percentage increase on par with the CEO’s? Of course not.

It’s no wonder that thousands of Americans are upset with corporate leadership. The inequity so blatantly demonstrated by outsized executive pay is part of what fueled the “Occupy Wall Street” movement. People don’t expect millions of dollars each, but they do expect a fair share that reflects their contribution to a company’s improved performance.

Boards of directors who approve these soaring pay packages for CEOs mustn’t act as if they’ve forgotten our economy—not to mention jobs growth—continues to inch along like a slug after a rainstorm. As Rutgers Prof. Bill Rodgers points out in my High-5 Q&A, the U.S. is suffering from a severe problem of structural unemployment. The pool of actively unemployed Americans is 13 million, and 43% of those have been unemployed for 27 weeks or more. That’s a major reason why personal consumption by American consumers is dropping like a brick in quicksand. Most of us don’t have much disposable income!

To make matters worse, the rich get richer even when they get fired. According to a report released by GMI Ratings, 21 CEOs received more than $100 million each in “‘walk away” packages since 2000. In all, companies like GE, Exxon Mobil Corp., AT&T and Home Depot Inc., have collectively provided nearly $4 billion in golden parachutes. More than the GDP of Saint Lucia, the U.S. Virgin Islands and Liberia—combined.

How can boards justify these payouts? Golden parachutes are designed to protect CEOs, the report explains, from financial harm when they make M&A decisions that may be in the best interest of shareholders but that might lead to their losing their jobs. “Incentivizing executives into retirement,” the report says, by having stock compensation continue to vest during retirement, is also in the best interest of shareholders because it ensures that the decisions made by the executives are in the long-term interest of the company despite the proximity of their retirement age.

This makes sense in principal. But I agree with the writers of the report when they say a CEO should not need three or even two years’ salary and bonus, plus immediate vesting of all equity … plus benefits, as was paid to most of the CEOs in the report.

The onus falls on boards of directors to get the executive comp equation right. It’s no stretch to say that the American economy, indeed our global competitiveness depends on it.

  • TomV

    What a great article. These thoughts are more than just opinions, they’re facts. Most people are recognizing these trends, but are unable to voice their disagreement or are in denial with the “trickle-down” theory.

    Let’s make one thing very clear. Trickle down does NOT make our economy humm–its jobs for the masses. And jobs won’t accelerate until people have resources to start companies and hire. Oh–and those $350M payouts for running a company into the ground could instead be distributed to worthy employees of the company who will then help pull the company up, which in turn, rewards the investors. A better approach to fixing the company, the sector, and the economy.

    Keep up the great work, ROC.

    • Roger O. Crockett

      Thanks for reading and for your intelligent comments. Let’s hope more big businesses are listening.

  • JK

    At the end of the day it boils down to a couple of things – one of which you mentioned: that we all want our ‘fair share’. Smart companies reinvest in their own product, which is their company and workforce; thus adding value and positive growth. Very smart companies also invest in their surrounding community, industrial community and high exposure charities; all in an effort to curry favor – in all forms. Salaries and reinvestment are determined, ideally, by one deciding factor: what do we (the company) get out of the deal. If CEO X makes $25M a year, but through connections, efforts, leadership and knowledge gained, drives sales of company X’s product up 100% – then is $25M justified. Our collective answer is: ‘only if MY stock value goes up at least 25%’..:). Is a CEO making X per year more or less justified than let’s say a professional athlete making X? And there we come to the term we all know and hate well: market value. What does the market (or one’s perception of the market) dictate is ‘fair’ value for the ‘talent’ or better – value for the ‘return on investment’. In the end if we don’t agree – we simply stop purchasing the ‘product’; or we ‘ask’ the government to step in and ‘regulate’ it for all of us. Depends if you like your business world regulated socially or capitally. Big business is big business. Accept it or take steps to change it. In the end if we concentrate on ourselves, and strive to grow our own ‘market value’, then we reap the rewards, and sleep better @ night too…:).

    • Roger O. Crockett

      JK, well said. I appreciate your intelligent analysis. For the record, Disney’s stock was essentially flat in 2011, rising from $37.20 in January to $37.50 in December.