The Democrats reportedly want to “do something” to tether the ever-soaring executive compensation, and President Bush stepped into the CEO pay fray last week when he went to Wall Street and pronounced, “You need to pay attention to the executive compensation packages that you approve.”
That raises an interesting question: Why don’t directors do something to stop what’s widely viewed as runaway CEO pay?
After all, there’s a constant, withering attack on CEO pay. You’d think they’d hear the roar of outrage, yet corporate directors seem to have a tin ear and keep approving astonishing payouts.
Why? Well, the cynical answer goes something like this: Executive compensation is a rigged system. The CEO appoints his buddies to be on his board; they appoint him to be on their boards. Each rubber-stamps big payouts for the other. They have an incentive to give big payouts, and since the money is coming from the companies, not from the directors personally, there’s little incentive to hold down salaries.
Cynicism aside, it’s hard to dispute that notion. Look at the roster of directors of big companies, and you’d think you were reading the names of the membership committee from the country club. There’s a good deal of mutual back-scratching going on in corporate board rooms. (There’s an image that’s creepy on a couple levels.)
But there’s another reason why directors approve big payouts. They may not seem all that big, when put in perspective. After all, when directors look around and see what top performers in other fields make, they see something like this:
Nicole Kidman makes an estimated $16 million or more per movie and Jim Carrey makes $25 million. But that’s just per movie. If you figure they make more than one movie a year and if you add in the other stuff celebrities earn, the pay for a well-known celebrity can exceed $100 million a year. Forbes last year estimated Oprah Winfrey makes $225 million a year.
David Beckham, a soccer player who, by many accounts, may not be washed up but is pretty wet, has just agreed to be paid $250 million over five years by the Los Angeles Galaxy.
Howard Stern, who got a $500 million contract to be on Sirius radio, got a bonus a bonus! of $83 million last month.
I could go on. J.K. Rowling, the author of the “Harry Potter” franchise, is a billionaire. Even the Aussie kids band the Wiggles made an estimated $45 million a couple years back.
As corporate directors look at those figures, they may reasonably ask if it’s truly excessive for, say, Ray Irani of Occidental Petroleum to make $87 million in annual total compensation (salary, stock options, etc.) or Angelo Mozilo of Countrywide Financial Corp. to make $41 million. Since they were among the very highest-compensated in Los Angeles, according to the Business Journal of last May, it means most CEOs make far less.
Directors could argue that for all a CEO is expected to do be a motivator, set a course, articulate the vision, command an industry and, ultimately, grow their enterprise to create shareholder value he should be compensated on par with the Wiggles.
Now, if those directors just packed their executive compensation committees with truly independent folks instead of their buddies, maybe more of us would believe that argument.
Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].
