Poor Performance Often Linked to Excessive Executive Pay

Much attention has been given to the decision by the CEOs of General Motors (NYSE:GM) and Ford (NYSE:F) to take only $1 in salary. For many people that’s at least one dollar too much, and as Audit Integrity’s Jim Kaplan points out, Ford CEO Alan Mullally’s total compensation over the past two years amounted to some $50 million. Audit Integrity finds a close correlation between excessive executive compensation, overall poor corporate governance and inferior market returns across a wide range of industries.

Kaplan says Audit Integrity’s analysis of the 80 firms on its Investor Watchlist of companies with poor corporate governance characteristics, found that all but 14 have excess executive compensation (defined as exceeding the compensation of 80% of industry competitors).

In other words, the executives who are delivering the worst performance are collecting the highest compensation.

The Investor WatchList return year-to-date shows a decline of 46 percent, worse than the overall market decline of 29 percent. Some of the lowest ranking companies on the Watchlist are familiar names such as State Street (NYSE:STT) and eBay (NASDAQ: EBAY), as well as behemoths Procter & Gamble (NYSE: PG) and Hewlett Packard (NYSE: HPQ). GM and Ford are not included.

Comments

[redbaron:]

AI, as I recall, it was the CEO of P&G, who was so outspoken about the need for a new generation of American workers who were better educated and more flexible, during the down-sizing that happened during the 1990's. While I haven't tried to research the individuals involved, either then or now, one now has to wonder if the need for change might have been slightly mis-placed. What goes around, often comes around again, but with a slightly different emphasis.

2008 Dec 09 01:10 PM

[TB3:]

I suspect that most of Mr Mulally's $50 million in compensation is in stock options, which will be worthless unless he's successful in turning the company around to the point where the stock price improves significantly. If he's successful, then his compensation will have been well worth it.

2008 Dec 09 03:34 PM

[eyes wide open:]

As whole it is my belief that almost all of our past downsized companies, it always seem to have given CEO, CFO, and COOs’ bonuses worth ten of millions of dollars after their downsizing. I will not give the corporation name but in August 2001 this corporation was required to shed 5000 jobs from their work force nation wide. By November 2001 these 3 officers received 47 million dollars worth of bonuses that they divided among themselves. Did these officers spread their monies around better than 5000 employees could?

2008 Dec 09 04:26 PM

[winger27:]

tax the hell out of all executives making over some pre-determined factor of their companies lowest paid workers. Put the money is a special fund to train laid off workers, give them councling, new clothes, unemployment pay, etc.... make this tax also directly related to the general unemployment figure... the higher it goes, the higher the tax... I'm SOOOOOO sick of greed in the country....

2008 Dec 09 11:56 PM

[Ex Corp Guy:]

At the risk of defending senior executives (which is highly out of vogue these days), I think it's important to consider how much of their compensation is tied to the stock performance. While I don't know anything about the auto company plans, I'm reasonably familiar with at least one of the comp plans of the group mentioned. Considering only that one...about 90% of the of stated comp is based solely on the stock performance. So, if the stock is stagnant the comp is dramatically lower.

10% of a really big number is still a lot of money but I think we get carried away looking at these over the top possible comp numbers (if the stock does well) and then compare that comp to poor stock performance without readjusting the value of the total comp package down to match the stock performance.

Another way to look at this might be to reapply how financial planners make their money...a fee that is a percent of "assets under management". Usually that number ranges from about 1.25 to 3%. If you consider the market cap of these firms as the "assets under management", at least one of these guys falls into the 1% range if the stock grows and about a 0.1% if it doesn't. Most folks would be pretty happy with a deal like that from their financial planner.

2008 Dec 10 08:37 AM

[Joyful Alte...:]

Winger, there's a lot to be said for returning taxes to the levels of the Eisenhower level.

2008 Dec 10 09:48 AM

[nakedjaybird:]

It is a myth that one must pay a lot to get good executives: look around at the evidence.

Reach down a couple levels of management in most corporations and you will find ample numbers of very capable folks hungry to run the company for a 20% raise above their $200,000 salary. No bonus'.

Pay for performance at that level. If they perform; they get paid. If they don't; they get replaced. Their pay is their pay. That;s it.

If they want perks like country club memberships, stadium seats, etc., they pay for them themselves out of their pay (all those real costs to a corporation that get written off as marketing expenses which would bring another 5% of revenue to the bottom line).

Bottom-line: NO MAN IS WORTH A LIFETIME INCOME IN ONE YEAR.

Second bottom line: NO MAN SHOULD BE PAID ANY MORE THAN 20X THE LOWEST PAID EMPLOYEE ON THE PAYROLL (NO, NOT EVEN THE AVERAGE PAID EMPLOYEE!).

It's the Ben and Jerry Icecream model folks. It works. The owners win and so do the consumers. It's "LEGAL THEFT DENIED!!!.

2008 Dec 10 01:22 PM

[Et tu, Brute!:]

nakedjaybird:

What you said!!! In spades!!!

Nor should an incompetent CEO be paid multi-millions aka Golden Umbrella to get him out the door!!! "They" should suffer like any other John or Jane Everyman!!!

2008 Dec 10 02:17 PM

[nakedjaybird:]

It goes understood, that if one does not perform, he does not get paid: he get's fired. No parachutes allowed!!! No pay to leave. Duh!!!!

2008 Dec 10 02:28 PM

[MontanaMan:]

I don't know where Audit Integrity gets their numbers or how they do their calculations but P&G has exhibited 15% per year share price growth since Mr. Lafley took over as CEO. It has held up far better than the rest of the market over the past year, donw only 18% vs. 40% for the S&P. I'll side with Mr. Lafely any day of the week.

2008 Dec 10 04:56 PM

[Ex Corp Guy:]

MontanaMan,
Agree. I'll take AG over just about any other CEO. That said, part of his 15% growth curve since 2000 was because his predecessor gave away 50% of the stock price in 2 weeks fighting over Warner-Lambert. AG was in the job about 3 years before Procter reached it's pre W-L levels.

As for looking down into the organizations a couple levels to find execs, I agree that you'll find lots that are "hungry to run" the place. I don't believe that you'll find many who are "capable to run" it and that's the key.

2008 Dec 10 06:09 PM

[nakedjaybird:]

The turnover and promotions within major corporations tells the truth and provides the facts about capable folks down the organization: first, where do you think the top guys came from?? Below. Waiting for the opportunity. And when passed over, they become the top guys hired elsewhere. It's happened for generations. Where you been Montanaman?

Further evidence occurs way too often in professional sports. And I'm not suggesting then that top executives get paid as atheletes do. That's way out of whack due to poorly led corporations writing off all the marketing expenses for stadium seats; a 5% cost that would better serve the stockholders. Same for the peoples tax dollars to pay for the stadiums; IT'S A BUSINESS; LET THEM BUILD THEIR OWN FACILITIES.

2008 Dec 11 01:00 PM

[Ex Corp Guy:]

NakedJaybird,
You're absolutely right: Top guys used to be not top guys. You're also right that when passed over, they sometimes (often) leave to become top guys elsewhere. What you haven't considered is what those other "top jobs" look like compared to what they didn't get. Example...look at the resume for the CEO of CAH, a now 11.7billion (market cap) firm. He got passed over for the top job at a 175 billion (market cap) firm. Look at the CEO of La Printemps Department Stores, worth about $1 billion, passed over to run a $22 billion business. Look at Nardelli leaving GE to become CEO of Home Depot...passed over for CEO of a $170 billion to take become CEO of a $32 billion firm. There are many other examples but I think the basic conclusion is that the "somewhere else" is very rarely the same sized role that they were passed over for.

Where we do agree is that if these guys at the top aren't delivering, they should get booted. It shouldn't take 10 years of "head in the sand" thinking and 5 years of decline. It also shouldn't include an additional 20+million bump just to walk out the door. That's insane.

2008 Dec 11 05:02 PM

[Ex Corp Guy:]

What we haven't talked about is the Board of Directors for these firms. Take a look at the GM Board...not exactly the stellar cream of the crop icons of American industry. Let's see - retired CEO of Kodak (yep - they're one to emulate). How about the retired President of Compaq Computer (don't we wish they were still around?). Then there's the retired CEO of Sara Lee (is there a less relevant food company in the country?)

Part of the reason GM is on the verge of extinction is that their Board was more asleep at the wheel than Wagoner and his senior management team.

2008 Dec 11 05:10 PM

[nakedjaybird:]

WE agree somewhat Ex Corp Guy; my experience has been that the passed-over guy (generally a minimum of 2 out of three, sometimes 4-5, lose out to the winner); and those not winning the promotion carry on running their portions of the business waiting for the next opportunity - and all 4 or 5 of the losers are really capable and qualified - maybe not the personality for the ones chosing the winner - which changes the next time around; often, the top guy surrounds himself with his team where possible. Point being, those not winning ie., the passed over, are not really losers or lesser thans, they just did not win this time. The really good ones move on - and are good. Those passed over within GE are not generally poor executive material. In fact, probably better than most. And what I am saying is that quality runs several layers deep. Lots of capable guys. Now, when these folks are just managers, like a housewife runs a household, not much to say. Problem is, most corporations could do well having a housewife run the entity. Sometimes, that's all it takes when good people do their jobs below them. Most of wall stree and the Govt regulators don't qualify as housewives running a household. Lot's of proof for that. They thought there was not tomorrow or responsibility for what they were doing. No husband to be accoutable to, nor children; responsibiltiy and accountabiltiy, both.

2008 Dec 11 11:04 PM