Oversized Executive Pay and Bonuses under the Microscope.

[a_unique_person]

http://business.theage.com.au/business/all-bull-and-no-bear-20080929-4q6n.html


It may be the taxpayers who are bailing out executives on Wall Street but in Australia it's the shareholders.

Stumbling Queensland banking and insurance juggernaut, Suncorp (http://markets.businessday.com.au/apps/qt/quote.ac?code=sun), has just shown precisely what not to do. That is, shower executives with unseemly pay rises while shareholders get it in the neck.

Chief executive John Mulcahy (http://www.suncorp.com.au/suncorp/About/committee.aspx) enjoyed a pay increase from $5.3 million in 2007 to $6.2 million in 2008. During that time, net profit actually dropped from $1.1 billion to $556 million. Yet the more accurate reflection of how shareholders fared is an earnings per share measure, and EPS dived from $1.59 to 60 cents per share.

A Suncorp spokesman was at pains to point out that Mulcahy's short-term incentive component had been scaled back.

This is a prelude to the kind of sophistry to which we can look forward in the annual report season now upon us (the season when pay cheques are unveiled) as executives - who are in reality just managers of a business belonging to other people - seek to rationalise their avarice.

Why John Mulcahy picked up an STI, or any kind of bonus at all this year, is the pertinent question. Besides earnings sliced in half, the share price began the financial year at $16.92 and closed it out at $13.04. It is now $10.40.


So much for such massive pay rates having anything to do with these people being economic or business geniuses. They don't have any magical powers, and it's all about making them rich.

[Almo]

I personally like the multiplier method of CEO pay. Noone at the company can make more than some number N times the amount the lowest-paid worker.

Socially progressive Ben & Jerry's, which for a decade capped executive pay at seven times the salary of the lowest-paid worker, dropped the provision in 1994 when it sought a CEO to replace co-founder Ben Cohen. Whole Foods Market, the popular organic supermarket chain, has raised its cap twice--from 8 to 1 in 1997, to 14 to 1 today, though that's still considered low. source (http://www.time.com/time/magazine/article/0,9171,994290-2,00.html)

I must admit it carries its own problems. But as a principle, I like it.

[Francesca R]

Critics of "high" executive pay:

"Giving the CEO a huge bonus when profits and EPS went up is encouraging short term thinking in business"

"Giving the CEO a huge bonus when profits and EPS went down is rewarding failure"

Proponents of "high" executive pay:

"Giving the CEO a huge bonus when profits and EPS went up is aligning personal and business incentives (rewarding success)"

"Giving the CEO a huge bonus when profits and EPS went down is encouraging long term thinking in business"

So much for executive pay having anything to do with the merits and drawbacks. It's all about ideology?

[Jaggy Bunnet]

I personally like the multiplier method of CEO pay. Noone at the company can make more than some number N times the amount the lowest-paid worker.



I must admit it carries its own problems. But as a principle, I like it.

So the most senior people now have an incentive to contract out low paid workers positions, even if that costs more than employing them?

Not sure that is a good idea.

[Francesca R]

And to that news story quoted in the OP:

In Australia the shareholders are bailing out executives? Fantastic! Go for it, shareholders.

[quixotecoyote]

So the most senior people now have an incentive to contract out low paid workers positions, even if that costs more than employing them?

Not sure that is a good idea.

If you're willing going to go as far as a multiplier cap based on employees, you're probably willing to extend the cap to contract workers.

[IllegalArgument]

So much for executive pay having anything to do with the merits and drawbacks. It's all about ideology?

I don't have an opinion on companies that will not be getting help purposed economic bailout act. Though it does smell like a bunch of insiders giving each other sweetheart deals.

Those companies that are taking part of the bailout, should have restrictions, this is corporate welfare, people on individual welfare have restrictions so should corporations involved since they are considered "persons" under US law. After they are back on their feet, then can give whatever fat contracts their CEO's demand.

Of course, to start with, I think CEOs are very overrated.

[Jaggy Bunnet]

If you're willing going to go as far as a multiplier cap based on employees, you're probably willing to extend the cap to contract workers.

Not contract workers, someone else's employees.

Instead of employing 10 cleaners for 40 hours a week at $10 an hour, I contract with ABC Cleaning Inc to provide me with a full cleaning service costing $5,000 a week.

I don't have contract workers and I have got rid of those pesky low paid employees who were keeping my salary down.

I also note that Ben & Jerry's dropped the policy when they were replacing a co-founder with a new CEO and from this link:

http://www.fastcompany.com/magazine/02/team1.html

that the CEO of Whole Foods Markets is also a co-founder.

My rather strong suspicion is that as co-founder's both of these guys have sizeable interests in the shares of the company. Taking a lower salary means more available to shareholders, means higher dividends / higher share price.

Obviously the amount Ben & Jerry were paying was not enough to attract a suitably qualified replacement.

[dudalb]

http://business.theage.com.au/business/all-bull-and-no-bear-20080929-4q6n.html



So much for such massive pay rates having anything to do with these people being economic or business geniuses. They don't have any magical powers, and it's all about making them rich.


A lot of CEO are grossly overpaid, and I do not like the "Old Boys Network" aspect of it at all, but suggestin, as you seem to be doing, that running a large corporation well requires not talent, skill, or intelligence is silly.
And sounds like you just don't the like the idea of people becoming wealthy, period.

[Almo]

I also note that Ben & Jerry's dropped the policy when they were replacing a co-founder with a new CEO and from this link:

Did you read my entire quote? It mentions they dropped it. I was not being deceitful here.

[a_unique_person]

A lot of CEO are grossly overpaid, and I do not like the "Old Boys Network" aspect of it at all, but suggestin, as you seem to be doing, that running a large corporation well requires not talent, skill, or intelligence is silly.
And sounds like you just don't the like the idea of people becoming wealthy, period.

I referred to 'magical powers', that is, the notion that somone is worth a lot, lot more than the most of us. If I am working in a company, I want someone who is intelligent, skilled and talented in charge, and I want them paid a reasonable amont. But what I see instead are people who are good at selling themselves at having some sort of superhuman intelligence, skill and talent. I don't think so. Event's have proven that.

I worked for EDS for a while, and the moral plummetted when Dick Brown ran the place. He actually had his autobiography printed and handed out to everyone who worked there. I don't know anyone who read it. The company was in trouble already, but it sank like a stone with him running it.

[SimonD]

One of the first things I learnt when I started working after leaving school is that if a person is being paid $10 an hour they need to be making $30 an hour for the comapny. I doubt very much that CEO's bring this much value to their companies.

I find it incredible insulting that CEO's can sack large numbers of people or that the people making the profits are denied annual pay increases while these jokers are getting paid millions.

[Jaggy Bunnet]

Did you read my entire quote? It mentions they dropped it. I was not being deceitful here.

I did, that was where I "noted" it from. Sorry if it came across as if I was suggesting this was new info.

I thought that might be relevant (i.e. that such provisions are likely to exist only where the person whose salary is restricted has some other method of participating in the company's success) so did a quick google on Whole Foods and found the same thing there - CEO & co-founder.

[WildCat]

But what I see instead are people who are good at selling themselves at having some sort of superhuman intelligence, skill and talent. I don't think so. Event's have proven that.
Isn't that the way any job goes? The best person for the job doesn't necessarily get it, the best interviewee does.

I do think executive pay is way out of control, and this is due to the way too cozy relationship many board members have with executives. Too many board members are loyal to the executives, when it is shareholders they are supposed to be working for. Reforms on the way board members are selected would be a much better way to bring executive pay to more reasonable levels, rather than a one-size-fits-all legislative solution. But I certainly won't argue that any company going to the government with their hand held out for taxpayer money should have whatever restrictions placed on them lawmakers deem necessary.

[Travis]

One of the things that brought down Enron was that they had a bonus/compensation system that rewarded short term profit with no mechanism to see how those deals would work out long term. Individuals who refused to do bad long term deals that had good short term results were denied bonuses while those that did not only got the bonuses but were often promoted.

[Almo]

I did, that was where I "noted" it from. Sorry if it came across as if I was suggesting this was new info.

I thought that might be relevant (i.e. that such provisions are likely to exist only where the person whose salary is restricted has some other method of participating in the company's success) so did a quick google on Whole Foods and found the same thing there - CEO & co-founder.

It's a good point. If I founded a company, I'd use it too. :)

[dudalb]

I do think executive pay is way out of control, and this is due to the way too cozy relationship many board members have with executives. Too many board members are loyal to the executives, when it is shareholders they are supposed to be working for. Reforms on the way board members are selected would be a much better way to bring executive pay to more reasonable levels, rather than a one-size-fits-all legislative solution. But I certainly won't argue that any company going to the government with their hand held out for taxpayer money should have whatever restrictions placed on them lawmakers deem necessary.

The classic example of that was Michael Eisner and the Board at Disney, where the Board was nothing but a rubber stamp for Eisner for years. It was until Roy Disney quit the board ,and started a shareholders revolt, that Eisner was finally forced out of office, along time after he should have been.
See the excellent book "Disney Wars" by James Stewert for the gruesome details.