It's getting harder for imperial chief executives to hold on to power. That's raising hopes that the idea of imperial CEO pay also will soon be dethroned.
Corporate reform activists, including those who have long campaigned against outrageously inflated executive compensation packages, have seen reason for optimism this year, with three veteran CEOs facing their denouements.
Walt Disney Co. directors finally picked a successor to Michael Eisner, who in recent years had become a symbol of entrenched--and tremendously enriched--company management.
In New York, Maurice Greenberg agreed to step down after nearly 40 years at the helm of insurance giant American International Group Inc., which is facing state and federal probes of its business and accounting practices. As with Eisner, Greenberg has been widely accused of operating his company like a private fiefdom and snubbing shareholder concerns.
Bernard J. Ebbers, the former chief of WorldCom Inc. and an icon of 1990s-style executive greed, suffered a much more spectacular fall: He was convicted by a New York jury on accounting fraud charges related to WorldCom's 2002 bankruptcy.
To their critics, all three men and their companies are textbook cases of what can go wrong when corporate directors fail to live up to their stewardship obligations.
It's too late for WorldCom and its investors, of course. The departures of Eisner and Greenberg, however, were hailed as fresh signs that directors are taking to heart the tighter corporate oversight that shareholders, regulators and Congress have been demanding over the last three years.
The typical investor probably cares little about the details of much of that oversight. Executive pay is the glaring exception. People are interested in what CEOs and other top corporate officers make; the shock value of the numbers has simply become too great to turn away.
Are directors ready to seriously address what the public views as outsize executive compensation?
"When you see CEOs being removed who you never thought would be removed, compensation is next," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
The "madness" continues
Skeptics will say they've heard this before, and they're right. "The Madness of Executive Compensation" was a Fortune magazine cover story in 1982. As it turned out, the madness was just beginning. Base salary, cash bonuses, stock options, long-term incentive plans, deferred compensation, golden parachutes--the pay fountain has since runneth over and then some, critics say.
Some frustrated shareholder activists have suggested that corporate boards or the government should impose outright caps on executive pay. That clearly isn't going to happen in our free-market society.
If compensation is going to be rethought, it will be because the stars finally are aligned for it. For example, WorldCom and other high-profile corporate fraud cases have left investors sensitized to executives' conduct. Also, a generally sober outlook for stock returns means the market probably won't help paper over CEO piggishness, as it did in the late 1990s.
Add in these factors as well: the looming requirement that companies begin formally counting stock options as expenses; the ease with which shareholder activists can spread the message about egregious pay over the Internet; and, possibly most important, changes in laws and regulations since 2002 that have left directors much more vulnerable to lawsuits if they fail in their responsibilities as fiduciaries.
Justifying pay levels
Securities and Exchange Commission Chairman William H. Donaldson says the burden today is squarely on company directors to decide how to measure a CEO's performance and to show investors how those measurements justify a particular level of pay.
"Company boards must show greater discipline and judgment in carrying out their fiduciary duties ... to award pay packages that are linked to long-term performance," Donaldson said in a speech in March to the Directors Education Institute at Duke University.
Now, read almost any company proxy statement and you'll find language to the effect that executive pay is performance-based, often according to formulas that boards develop with the help of outside compensation consulting firms.
The problem is that "performance" remains too squishy a concept at many companies, at least when it comes to top executives, said Patrick McGurn, senior vice president at Institutional Shareholder Services.
Why, he asks, should a CEO get a substantial cash bonus for what the directors might describe in the annual proxy as "shepherding the company through difficult times"? Isn't that what a CEO is supposed to do?
Or, he continued, how about this as justification for a bonus: "The company maintained market share in several key areas." Not increased, just maintained. That's worth a fat reward?
(For entertainment, if not insight, investors with stock in individual companies definitely should spend some time reading the compensation reports in their proxy statements this spring.)
McGurn said directors must harden their definitions of performance and make clear that executives face meaningful pay consequences, at least beyond base salary, if performance falls short.
"What you still don't see enough of is where, if the performance is down, the pay is down," McGurn said.
Lake Wobegon effect
In his speech, Donaldson advised directors to get out of the trap of authorizing inflated pay because of compensation consultants' recommendations.
Consultants often advise that, for a company to be competitive, its executives should be paid in the top quarter of their industry if they meet prescribed performance standards, he said.
That, Donaldson said, leads to a Lake Wobegon effect, as in that mythical town where "all the children are above average."
"It is the job of the board to set appropriate compensation that is related to the goals and performance of top management, not the pressure to meet an artificial standard informed by outside consultants who do not owe a duty to your shareholders," Donaldson said.
Knowing that it has the attention of directors in the post-WorldCom, post-bear-market environment, the SEC is in a strong position to wield more influence over the determination of executive compensation.
It can do so, in part, by ordering clearer disclosure of the components of pay in proxy statements, for example. Shareholders shouldn't have to make like Sherlock Holmes to figure out what a CEO is taking home, Donaldson has said.
Yet many proxy statements continue to be fuzzy in explaining pay elements, McGurn said.
In the aftermath of the wave of corporate accounting scandals and laws like the Sarbanes-Oxley corporate reform act, "for pay to still be obscured is pretty pathetic," he said.
Even so, McGurn said, he believes that progress is being made in persuading directors to be more disciplined in setting executive compensation, and in terms of directors' recognition that pay-for-performance matters to shareholders. Count him among the hopeful that real change is coming.
"I see the glass as one-quarter full," he said, "rather than three-quarters empty."
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CFOs who made more than $1 million
Among the 25 largest companies in Illinois, these chief financial officers made more than $1 million in salary, bonuses and other annual compensation in the most recent fiscal year.
CFO COMPANY SALARY BONUS TOTAL CASH* *Includes value of perquisites and other items listed under "all other compensation" and "other annual compensation" categories.
David Devonshire Motorola $642,308 $1,164,858 $1,896,020
Dan Hale Allstate $540,003 $1,182,173 $1,736,029
Matthew Paull McDonald's $578,120 $1,015,000 $1,705,383
L.M. de Kool Sara Lee $444,167 $718,617 $1,588,628
Robert Shapard Exelon $531,538 $501,830 $1,549,495
Bernard Freibaum General Growth Properties $900,000 $464,672 $1,374,922
David Bolger Aon $774,039 $560,000 $1,342,189
Thomas Freyman Abbott Laboratories $617,308 $685,000 $1,341,492
Craig Omtvedt Fortune Brands $535,000 $461,400 $1,285,172
Nathan Jones Deere & Co. $469,885 $620,918 $1,097,075
James Bell Boeing $596,154 $491,400 $1,094,320
Source: U.S. Securities and Exchange Commission