The bottomless well of CEO greed
Free Beer!… And other perks CEOs get when they lose their jobs.
I used to work in Corporate Compensation and even administered the executive comp system for a Fortune 100 bank. That was in 1999 when thing really started to get crazy. The analysts then knew that things were really going off the rails. Some of the banks in the league tables tried to constrain the explosion but were wildly unsuccessful.
A big part of this is fueled by performance based pay. It used to be that CEO's drew large salaries and had lots of perks and some stock. Corporations found that they could defer the those salaries in favor of stock options and grants. That would then put the CEO's focus on stakeholder value which is his fiduciary duty anyway. The idea being, that if he's a large shareholder he will act to increase share value to benefit himself and subsequently, the other holders as well. Further, they found they could defer those stock awards and bonuses to the end of the CEO's term which would allow them more time to use that money and defer issuance of stock to some (usually undetermined) point in the future. All of this helps with corporate liquidity and favorable accounting accrual and amortization rules.
The downside was that nobody expected things to get completely out of control.
Now you have CEOs making many thousands of times the average salary of the employees. You have CEOs running companies into the ground and getting massive bonus packages for doing so. Frankly, any one of us could do a job that poor yet are not hired for such jobs. The thing about the "C Level" is that its a very exclusive club and nobody ever really gets kicked out. Once you've made it to that level, it's very easy to get additional jobs no matter how bad you've done in the past.
That's not to say that companies that lose money shouldn't give bonuses to corporate officers. Frequently, the ombudsman will project a certain loss for a given year and if the CEO reduces that loss by a significant factor, there will be watermarks for bonuses. Usually these guys are turnaround specialists who are brought in to lagging companies with strong brand identity. They are very well regarded and sought after. Irrespective of industry, they usually have the toolset to jump from one company to another and get them back on track. They also tend to be highly frictional short term CEOs. They fix them up and leave (usually with lots of cash when they go).
In short, my recommendations would be:
I used to work in Corporate Compensation and even administered the executive comp system for a Fortune 100 bank. That was in 1999 when thing really started to get crazy. The analysts then knew that things were really going off the rails. Some of the banks in the league tables tried to constrain the explosion but were wildly unsuccessful.
A big part of this is fueled by performance based pay. It used to be that CEO's drew large salaries and had lots of perks and some stock. Corporations found that they could defer the those salaries in favor of stock options and grants. That would then put the CEO's focus on stakeholder value which is his fiduciary duty anyway. The idea being, that if he's a large shareholder he will act to increase share value to benefit himself and subsequently, the other holders as well. Further, they found they could defer those stock awards and bonuses to the end of the CEO's term which would allow them more time to use that money and defer issuance of stock to some (usually undetermined) point in the future. All of this helps with corporate liquidity and favorable accounting accrual and amortization rules.
The downside was that nobody expected things to get completely out of control.
Now you have CEOs making many thousands of times the average salary of the employees. You have CEOs running companies into the ground and getting massive bonus packages for doing so. Frankly, any one of us could do a job that poor yet are not hired for such jobs. The thing about the "C Level" is that its a very exclusive club and nobody ever really gets kicked out. Once you've made it to that level, it's very easy to get additional jobs no matter how bad you've done in the past.
That's not to say that companies that lose money shouldn't give bonuses to corporate officers. Frequently, the ombudsman will project a certain loss for a given year and if the CEO reduces that loss by a significant factor, there will be watermarks for bonuses. Usually these guys are turnaround specialists who are brought in to lagging companies with strong brand identity. They are very well regarded and sought after. Irrespective of industry, they usually have the toolset to jump from one company to another and get them back on track. They also tend to be highly frictional short term CEOs. They fix them up and leave (usually with lots of cash when they go).
In short, my recommendations would be:
- Create multiplier guideline for Corporate officer pay
- Keep incentive based pay but create high watermarks for stock options and grants
- Back loaded deals tied to company/stock performance
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