Executives Paid off

Introduction

     CEO – What comes into your mind at first? Lots of cash and benefits? Lots of rewards, fame and recognition in world’s leading magazines and newspapers? Right. Words like CEO, CFO, Vice-President, President and Chairman reflect wealthy and lavish lifestyle in today’s business world.

Roots of executive compensations were planted about two decades ago at World’s financial headquarter -The Wall Street, NY where investment banks and financial firms started giving lavish pay to their employees. In 1980s and 1990s financial giants like Morgan Stanley, Lehman Brothers and Goldman Sachs went public and shareholders added to the corporate equation. In those years executive compensation was seen as wealth of the company and before the financial crisis hit the market, Wall Street bonuses were hardly questioned (Story L., 2011).

     Today the questions are, is it worth to pay any executive such a high bonus or cash for the work? What kind of factors companies considered in determining executive compensation? The questions are very critical and many researchers tried to solve them in different way. The paper focuses on the discussion about executive pay and discusses is it worth to pay them such a huge amount or not.

Executives Paid Off

     Year 2010, one of the top US car manufacturers - Ford paid about $ 100 million to its CEO Allan Mulally and executive chairman Bill Ford, for? To save company from bankruptcy! How Allan Mulally and Bill Ford’s strategy worked or what actually they did, it’s not discussed, rather by seeing 19% increases in profit (Dominguez R., 2011). Here no person based or skill based compensation is observed. Do you think that 19% increase in sales was because of two persons only? What about engineers who designed those vehicles?

     Another lavish payout was observed in Hewlett-Packard Company, who paid about $ 42.2 million to its former CEO Mark Hurd including $ 17.6 million in cash and $ 6.6 million in stock and options. Mark Hurd received increase of 29% from its previous year (2009). At the same time HP was cost cutting and reducing jobs (CNNMoney, 2010). How much was this CEO worth?

     As the recession hit US market, federal aid was granted to many firms to save them from bankruptcy. For example the federal government paid out nearly $ 200 million to insurance conglomerate A.I.G. In the fragile condition, A.I.G. paid employees about $ 165 million in bonuses (Calmes J., & Story L., 2009)!

     If we examine the pay differences between bottom level employees or even some board of directors on non-executive board and top executive CEOs or vice president, there’s vast difference in their pay. For instance former Chairman, President and CEO of HP – Mark V. Hurd’s compensation was $ 30,332,527, Mr. Vyomesh Joshi – Executive Vice President of Image and Printing Group at HP was paid $ 11,644,691 where as other directors as non-executive board paid about $ 20,000 – 40,000 (Datamonitor, 2010)! Such a large difference, however companies never disclose their compensation strategy.

Determination of CEO Compensation

     The quantitative research performed by Cadman B., Klasa S., and Matsunaga S. (2006) used to help determine CEO payouts. For their research, they took Standard & Poor’s (S&P) 500, S&P 400 mid cap, S&P 600 small cap companies and also Russesll 3000 (1000 large cap and 2000 small cap) indices. The research looked at the differences between Executive Compensation and Non Executive Compensation firms.  They established three hypotheses;

·         ExecuComp firms rely heavily on earnings and stock returns in determining CEO cash compensation.

·         The weight on earnings is more sensitive to differences in the extent of growth opportunities for ExecuComp firms.

·         The positive relation between institutional ownership concentration and the value of stock option grants is stronger for ExecuComp firms.   

     Researcher’s first prediction seems to be reliant on the company’s balance sheet, the stronger the balance sheet and greater the credit, the higher the compensation. The authors’ analyzed individual performance measures, but they mostly focused on the company ratios and balance.

     For the second prediction there is not enough information available where on ownership concentration, the CEO’s age and tenure were factors needed to be considered. Finally researchers proved their hypotheses (somehow)! Here no job based or person based structured applied; only that the higher the balance sheet figures, the higher the compensation. Most of the data was retrieved from previous year’s figures and from various companies. In my opinion, there is not a single point in their research that answer the questions set forth such, why should CEOs be paid much?

Compensation Quandary

     Much debate and controversies on the lavish pay of top executives still continues. For instance Ira T. Kay (2006) and Edgar Woolard, Jr. (2006) presented their views on CEO pay.

     Ira T. Kay favored CEOs that are worth it be paid high compensation. He claims that pay for performance model still exists and he personally attended thousands of compensation meetings but never seen any top executives got approval of more than what he or she was worth. How the board of directors measured that was not clear. Further Ira said, to pay more to executives is also a strategy for companies to attract and retain employees, and those top executives are considered as asset to the companies. To protect companies’ assets by paying more (to executives) is considered as good investment. Also he said that CEOs and other top managers creates jobs for people and expand business.

     On the contrary Edgar - former CEO of DuPont argues that, executive compensations should be controlled and CEOs are not worth of millions of dollars. First he denies the myth that executives are paid for competition and compensation committees are independent. According to Edgar, today’s compensation scenario relies on agency surveys and consultant based professionals. Companies mostly rely on market survey firms who analyze top executive pay across various firms. Also those firms ask for figures on internal management where the CEO or top management determines their pay structure. Further criticizing CEOs’ tendency to show how much wealth they created for firms, Edgar discards the thought and said, CEO is not the only person who creates wealth. Also his anger for severance pay for failure is clear when he notes example of Philip Purcell of Morgan Stanley who paid $ 114 million. As per his view, the pay for performance model has failed.

Wall Street Under Eye

     After economic crisis, the Wall Street also put a very little control over CEO pay, how? By reducing cash compensation and increasing in rewards in stocks and shares. The New York State’s comptroller found that Wall Street distributed about $ 20 billion in cash in 2010 which was down 8% from the year 2009. Even the cash compensation is reduced, base salary increased for example, at Goldman Sachs base salary rise from $ 300,000 to $ 500,000, while at Morgan Stanley and Credit Suisse it rise $ 400,000 from $ 200,000. Does this make sense? Even Wall Street is under the eye of Uncle Sam money flow continuously from Wall Street (Story L., 2011).

     Is there any way to control top executive’s pay? One way is to give rights to shareholders to have a say on executive pay and the limits of payment. For instance several shareholders voted against Hewlett-Packard, saying the company has paid excessive to its executives compensation (Costello D., 2011).

Conclusion

     By looking at the researcher’s evidences and ongoing controversies, executive compensation seems to be like a Pandora box, an unsolved puzzle. According to me, in today’s corporate culture, pay for performance model has failed. Sometimes CEOs or CFOs get paid according to their background, where they come from, what was the previous position and so on. If we talk about skill base compensation, the engineer designing car engine is more skilled and worth of money than CEO of that automobile industry, have you ever heard that any chief engineer paid millions of dollar in compensation? Then why should only persons in management get paid? The fact of the compensation in my opinion is, stronger the revenue and sales, higher the compensation, today most companies rely on large revenue and sales figures to determine their compensation plan. Sometimes companies just pay more to sustain image in the market, even the executives that don’t  perform well.

     According to me, the compensation plan should have a limit and restrictions. When company survives on bailout, no employee should get bonus. And bonus should start from lover lever first where bottom line employees work on minimum wage or fixed income who not allowed doing overtime. But still CEOs (and other employees) at large firms get paid much in total compensation, why? Only because they are CEOs…

References

20 highest paid CEOs. (2010). Mark Hurd. CNNMoney. Retrieved on April 01, 2011 from http://money.cnn.com/galleries/2010/news/1004/gallery.top_ceo_pay/4.html

Cadman, B., Klasa, S., & Matsunaga, S. (2006, October). Determinanats of CEO Pay: A Comparision of ExecuComp and Non-ExecuComp Firms. The Accounting Review , 85 (5), pp. 1511-1543. DOI: 10.2308/accr.2010.85.5.15.11

Calmes, J., & Story, L. ( 2009, March 18). Outcry Builds in Washington for Recovery of A.I.G. Bonuses. The New York Times, pp. A1.

Costello, D. (2011, April 10). The Drought Is Over (at Least for C.E.O.’s). The New York Times, pp. BU1.

Dominguez, R. (2011, March 9). Ford rewards CEO Alan Mulally, Exec. Chief Bill Ford with $100M for rescuing company from bankruptcy. Daily News. Retrieved on April 05, 2011 from http://www.nydailynews.com/money/2011/03/09/2011-03-09_ford_rewards_ceo_alan_mulally_ exec_chief_bill_ford_with_100m_for_ rescuing_compan.html

Hewlett-Packard Compnay (2010, April 16). Company Profile. Datamonitor. Retrieved on March 31, 2011 from http://0-web.ebscohost.com.helin.uri.edu/bsi/pdf?sid=79dba83c-7af2-4b03-8d4b-7fec6ca5f8ae%40sessionmgr111&vid=2&hid=126

Kay, I., T. (2006, January/February). Don’t Mess with CEO Pay. Across the Board. Conference Board, Inc.

Story, L. (2011, March 3). Executive Pay. The New York Times. Retrieved on April 6, 2011 from http://topics.nytimes.com/top/reference/timestopics/subjects /e/executive_pay/index.html?scp=1-spot&sq=executive%20pay&st=cse

Woolard, E., Jr. (2006, January/February). CEOs are Being Paid Too Much. Across the Board. Conference Board, Inc.