Why you should care that IBM's CEO is grossly overpaid

Why you should care that IBM's CEO is grossly overpaid
Is she worth the money? IBM Chairman and CEO Virginia Rometty at a 2014 company event. (IBM)

Reader E.G. Rice of Marina del Rey has taken issue with my recent post on the nice raise that IBM has given its chairman and CEO, Virginia Rometty, despite the company's awful financial results in 2014. To recap, Rometty is getting a $3.6-million bonus for 2014 and a $13.3-million stock incentive award payable in 2018. She's also getting a 6.7% bump in her base salary, to $1.6 million from $1.5 million.

Rometty's pay is none of our business, Rice maintains in a letter to The Times published Thursday. Leaving aside a gratuitous slap at me in Rice's letter, he (or she) writes: "I fully understand that a private-sector worker's salary is a private matter between that person and his or her employer. Unless I happen to be that employer," Rice maintains, Rometty's pay "is, literally and figuratively, none of my business."


Rice's implicit question is germane: Why should we care how much Rometty is paid?

That's easy. There are several reasons. To begin with, IBM isn't merely a "private-sector" employer and Rometty is not merely a "worker" receiving a salary. She directs one of the top 25 public corporations in the country, the performance of which has powerful direct and indirect influence on the U.S. economy. That alone should make the pay and performance standards to which she's held by the IBM board matters of public interest. IBM has millions of shareholders, including those who own its stock via pension or mutual funds. That makes the company's performance and policies pertinent to most thinking citizens.

U.S. law recognizes the importance of top executive pay to shareholders and to the economy in general. That's why public companies are required to disclose that pay to the public. The very fact that we're told how much Rometty receives each year should show Rice that "literally and figuratively" it is our business.

Finally, Rice is wrong to suggest that there are only two parties involved in the decision of how much an executive gets paid--the executive and the employer (that is, the board and shareholders). There's another party with a direct interest: the taxpayer.

Executive pay is tax-deductible to the employer, within a certain framework. Salary and other cash compensation is deductible only up to $1 million a year. But "performance-based" compensation, including stock-based incentive programs, is deductible virtually without limit. That means that Rice, and I, and you, are all directly subsidizing Virginia Rometty's compensation.

How Rometty's pay package fits within the tax rules is murky, but IBM's disclosures on executive compensation imply that the vast bulk of it is tax-deductible, as is the case for most top executives at public companies. "Compensation derived from certain stock appreciation rights and from the exercise of stock options by Senior Executives under the Company's Long-Term Performance Plans should qualify as performance-based" (i.e., tax-deductible), the company says. 

So of course Rometty's compensation is the business of all of us. We're helping to pay it.

That justifies our coming to our own conclusions about whether her performance warrants her raise. In response to my earlier post, IBM spokesman Edeard Barbini offered by email to make me "familiar with a lot of what IBM and its leadership have done to transform the company and position it for long-term success." 

Barbini listed billions of dollars IBM invested in 2014 in advanced computing, cloud-based services, and next-generation semiconductor technology, while it sold off low-profit or loss-making businesses. "It's hard to say we've not done much when you look at the past year," he wrote.

Possibly, but that's not what I said. I acknowledged the company's initiatives, but observed that they haven't yet yielded higher revenue. My point is that Rometty's reward for her work should come after it's shown to have succeeded. 

Barbini also stated that "over the last 10 years, IBM has tripled annual net income from $6 billion to $18 billion." It's unclear where that $18-billion figure comes from, since the company's most recent financial results show its annual income for 2014 to be $12 billion, down 27% from the year before. For continuing operations (that is, minus the units closed or sold off) after-tax net income was $15.8 billion, down 6.7%.

In any case, Barbini's proffered time span is a little misleading, since Rometty has been CEO for only three of those 10 years, and IBM's quarterly sales have declined through virtually her entire tenure.
In short, IBM's performance under Rometty has been dismal. Is it our business? You bet it is.

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