Thursday, February 05, 2009
A short note on executive compensation
For those of you who delight in misfortune for the fortunate, this afternoon I spotted the following factoid in a newsletter (emphasis added):
CEO EQUITY HOLDINGS DOWN. According to a study conducted recently by Steven Hall and Partners, the largest U.S. corporations' CEO's personally lost a whopping $54 billion over the most recent fiscal year. These losses by CEO's of 175 major corporations amounted to 50 percent of the value of their total holdings. The median value of individual CEO total equity holdings, which includes shares owned outright, exercisable and unexercisable option gains, and unvested restricted and performance shares, fell from $60.9 million at the beginning of the period to $29.5 million at year end. Over the same period, these companies experienced a median decline in stock price of 37 percent. "Equity compensation has long been viewed as the most direct approach to linking the interests of executives with those of their shareholders," says Steve Hall, Managing Director. "While such linkage is appropriate and desirable," adds Pearl Meyer, Senior Managing Director, "Prudent boards are undertaking a comprehensive review of compensation programs to ensure that these programs are effective in motivating management to restore and grow future shareholder value as well as retaining critical leadership talent during this tumultuous period."
Now, you can argue that we ought not to care -- any group with a median stake (some of which is unvested) of $60 million can take the hit -- but you cannot argue that CEOs, most of whom do not run financial institutions, have not already taken a massive hit to their compensation, far greater in absolute and even percentage terms than most people, including many people who lose their jobs for a few months.
The point, of course, is not that we should pity these people. Rather, it is that their compensation is mostly subject to risk. I work for a successful company that generates lots of cash in a recession-resistant industry, and by some methods of measurement I have essentially worked for free the last two years. I am not complaining, but I am reporting without embarrassment or shame. The possibility of significant upside in good times, however offensive to the Great Unwashed*, is the reward for bearing the risk of big hits during the hard times.
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*CWCID: H.L. Mencken.
8 Comments:
By 
, at
Thu Feb 05, 10:37:00 PM:
While $5.4 big ones isn't chump change, it's way far south of $54 big ones my friend. Do the math TH - you're a CFO. This looks like the tag-team work of a NY Times editor and his young fact-checker.
By 
TigerHawk, at
Fri Feb 06, 01:29:00 AM:
Locker Room, I'm not sure you are right. The decline would be $5.4 billion if the $60.9 number were the *mean*, but it is the median. We are not told what the mean is, so a decline of $54 billion is possible (if the mean is 10X the median, which strikes me as reasonable if the figures include people like Ballmer, Jobs, and the Goldman guy).
By , at
Fri Feb 06, 08:39:00 AM:
The mean is around $308.5 million now and was roughly double that before. Since the median, half of CEOs above and half below, is so much less than the mean, some of these guys must really be rolling in it. I'd like to see a distribution.
JLW III
By , at
Fri Feb 06, 08:54:00 AM:
I plead guilty to mistaking the median for the mean. Upon first reading the piece, I found it hard to believe the average guy among this group of 175 was down by $300mm over the last year. But your point about Ballmer, Jobs etc. is valid - huge numbers of hits to their wealth would certainly skew a distribution. That said, public-company CEO compensation in this country is rigged game and too often results in egregious over-compensation relative to other members of senior management IMHO.
By joe buz, at
Fri Feb 06, 09:13:00 AM:
I would be interested in learning about the compensation for the Top 5 execs at Amtrak.
By BlueParrot, at
Fri Feb 06, 10:02:00 AM:
I cannot buy the 'not without risk' crap so long as those same execs get paid huge bonuses when their companies tank financially. I say make them eat from the same trough as their companies, when the companies lose money, the execs lose money too.
Executive compensation has lost all relationship to any real measure. It is as if royalty were installed at the top. The way I feel today, we should bring back tar and feathers for both executives and legislators. I say that because we never had capital punishment for executive crimes, but I would favor it if we tried.
By , at
Fri Feb 06, 12:52:00 PM:
"The possibility of significant upside in good times, however offensive to the Great Unwashed*, is the reward for bearing the risk of big hits during the hard times."
TH, I think in bad times everyone takes a big hickey and the scale of loss to a family losing a factory income can be far more devastating than the nominally greater loss the boss might take. As an owner of a small industrial business as well as a software company I have watched recessions take a huge toll on workers over the years, much more so than the stock losses of executives.
Carrying the argument further, I think plenty of very mediocre corporate executives have managed to get paid way more than they are worth during the great expansion we've just been through. Just look at bank execs. People like David Daberko making $100 million for destroying NCC, Stanley O'Neil for destroying Merrill, or whomever one wants to pin the Citi debacle on, were way overpaid. I'll bet you many GE holdeers are wondering if Jeff Immelt hasn't been way overpaid during his tenure. The compensation packages those fellows convinced the board to give them along the way should absolutely offend the great unwashed, and even the scrupulously washed too! And while those guys might be the minority I don't think their numbers are insignificant. Lots of corporate executives, in my opinion, are babysitters mostly, and never deserved outsized compensation. We should be outraged by their paychecks, or "should have been", past tense, since that pig has already swilled.
As an aside, I'll defend entrepreneurs, because I'm self-serving, who get paid a lot because society very much needs them to take risk and start businesses, regardless of the economic environment. Jobs come from that willingness to start businesses and grow them bigger. Most people won't take the enormous risk that process requires. But we should all recognize that it's the only way jobs are created, even government jobs. Saying one has worked for "free" because stock based compensation at the given moment has produced a net loss equal to or greater than the cash and bonuses one was paid along the way is obviously a snapshot-in-time issue. Small time data sets can produce weird effects, sometimes to the good (just ask Sandy Weill) and sometimes to the bad (like in your own instance). In the meantime, you've had a good living and the stock might come back in time. I say "might" only because I think the Congress is trying hard to impede that recovery.
By , at
Fri Feb 06, 02:43:00 PM:
Essentially free working recently?
Boy, if I was CFO in a public company I would expect $400k salary and a stock grant worth at least $2.5mil exercisable about every four or five years.
