Perhaps the most striking thing about the list of L.A.’s most highly paid public company executives is how little relationship there is between a CEO’s pay and the performance of his or her company.
Certainly, there are some highly successful companies on the list, but there are also plenty of stinkers. On paper at least, NetZero Inc. CEO Mark Goldston was paid an ungodly $153 million for a single year’s work, running a company that has never seen a profit, is spending millions of shareholder dollars on marketing, and is based on a business model (free Internet service) that many observers say is doomed to fail. Pay like that makes a company look less like an ongoing enterprise than a tool for enriching its leaders.
Next on the list is MGM, which has three executives among the top 10. Combined, their pay comes to more than $70 million in a single year. This for a company barely eking out a profit thanks to its only hit franchise, the James Bond series, but that shows little prospect for long-term growth.
Leonard Schaeffer is arguably earning his $11.8 million for running the nation’s most successful HMO in Wellpoint Health Networks, but how does Mike Bowlin justify his $13.2 million for turning Arco into acquisition bait? Or Loren Smith, who’s raking in $6.8 million for running another money-bleeding Internet firm, Stamps.com?
Most of this wealth is coming from a single source: stock options. In the past several years, options have emerged as the most popular way to compensate public company executives. Yet for all their popularity, it remains unclear whether stock options really improve CEO performance. Indeed, some research (see page 17) indicates there is no relationship between giant option packages and company performance.
While stock options may seem like an excellent motivator, they encourage CEO behavior that doesn’t necessarily benefit the company and its employees. Mark Willes, former chairman of Times Mirror Co., is a good example. Willes greatly boosted the value of Times Mirror stock under his tenure, but he did it mainly by cutting expenses and buying back shares not by strengthening the company’s underlying business. Indeed, his failure to expand the company into more-profitable forms of media than newspapers set the stage for Times Mirror to be acquired by Tribune Co., leading to the loss of another Fortune 500 company and downtown L.A.’s last major corporation. Willes, No. 21 on the list, collected $6 million last year.
Even if the city and employees didn’t benefit, at least shareholders were enriched by the Times Mirror buyout. But that isn’t always the case with highly compensated CEOs, as Mattel Inc. clearly demonstrates. Outgoing CEO Jill Barad left the company with a golden parachute worth well over $40 million, despite a disastrous performance that has left the toymaker a shell of its former self.
In the past, shareholders largely remained silent in the face of this kind of largesse, but if Mattel is any example, that’s starting to change. Board members were forced to sit stone-faced behind the podium at the company’s recent shareholders’ meeting as furious investors shouted at them from the audience, largely in anger over Barad’s pay package.
The law of supply and demand dictates that CEOs will be well paid; there is a very short supply of people with the skills and experience to run large public companies effectively. But high pay isn’t the same as obscene pay, and there is nothing to indicate that obscene pay makes for a better CEO. Given that reality, public company boards may want to take note of the song being sung by incoming school superintendent Roy Romer: Linking pay to performance makes sense.
