With Enron's former chief executive officer, Jeffrey Skilling, defending himself on the witness stand this week, my mind turns to CEOs with big egos. As I read the financial press, I'm also reminded that big compensation packages feed these big egos. CEOs' average pay increased 27 percent last year to $11.3 million, according to a survey of 200 large companies, as reported in the New York Times (NYT). That compares with an increase in average weekly pay for workers of only 2.9 percent in 2005. (With inflation at 3.3 percent, this means most workers are losing ground.)
By this key measure of CEO compensation, it looks like the infatuation with corporate leaders continues unabated, say the analysts at ElliottWave.com. They suggest that only a bear market will actually pull CEOs down from their revered status (à la Tyco's Dennis Kozlowski and Martha Stewart) and put a stop to excessive pay packages.
Each story about CEO compensation reminds me that something is fundamentally amiss in our capitalist, free-market system. That is, CEOs get paid more than they should, and shareholders (who buy company stock, which makes them part owners of the company) get paid less. CEOs' total compensation often increases far more than shareholders' total return. In fact, a New York Times story this week (April 10) shows that many companies increase their CEOs compensation even when shareholder value is down for the year.
I call that the "It's good to be king" mentality. If you can find a way to become the next CEO of the company you work at, take it. You will become wealthy. And your board of directors – loyal advisors and peers – will ensure that you are richer each year, whether you do your job well or poorly, whether or not you add to shareholders' total return, or whether the company grows or stagnates.
Take, for instance, The Wall Street Journal's recent report about some CEOs who had an uncanny knack for receiving their stock options on the date when the stock price was at a major low. (Why, how much better to reap the rewards when the stock price goes up.) How did they get so "lucky"? Looks like they got to pick the most favorable date by backdating their stock options. Directors had to be complicit in this sort of racket.
Warren Buffett does a good job of explaining how things get out of hand in his recent Letter to Shareholders of Berkshire-Hathaway:
"Huge severance payments, lavish perks and outsized payments for ho-hum performances often occur because [compensation] committees have become slaves to comparative data. The drill is simple: Three or so directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay statistics that perpetually ratchet upwards. Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish 'goodies' are showered upon CEOs simply because of a corporate version of the argument we all used when children: 'But, Mom, all the other kids have one.' When comp committees follow this 'logic,' yesterday's most egregious excess becomes today's baseline."
It's all too much like major league baseball owners who can't keep themselves from paying so-called franchise players more and more money, just to make sure that their star can brag about being the highest paid. "Stop us before we hire and overpay again," these hapless owners say. Fortunately, they're just bankrupting themselves (while charging fans more money to come to the ballpark), while compensation committees steal not from themselves but from the shareholders who get lower dividends or none at all.
Jeffrey Skilling said under oath that he had resigned partly because he was devastated by Enron's falling stock price. Was he really worried about the shareholders and the employees or his own pocket? A story about Enron in the Wall Street Journal back in October 2001 just before Enron went belly up includes an anecdote about how compensation committees operate. This story was told about CFO Andrew Fastow and the partnerships he fronted at Enron.
"Charles LeMaistre, an outside Enron director and president emeritus of the M.D. Anderson Cancer Center at the University of Texas, said he viewed the partnership arrangement partly as a way of keeping Mr. Fastow at Enron. ' We try to make sure that all executives at Enron are sufficiently well-paid to meet what the market would offer,' he said." [October 17, 2001, Wall Street Journal]
And there you have it – we overlook odd financial arrangements so that our people are paid more than others in the market. How can shareholders stop this kind of childish one-upmanship? I have a suggestion. Some of you who were teenagers in the 1980s may remember The Smiths and the anthem they wrote in response to Maggie Thatcher's policies: Shoplifters of the World Unite.
Shoplifters of the world,
Unite and take over.
Shoplifters of the world,
Hand it over,
Hand it over,
Hand it over.
Now might be time for a new anthem: Shareholders of the World, Unite and Take Over. Unlike shoplifters, you own your stock because you paid for it. Read your proxy and vote for proposals that hold the CEO more accountable. Submit shareholder proposals to be voted on that make it harder for the board of directors and CEO to be in cahoots about compensation. Read what the large pension firms like Calpers are doing about executive compensation issues. They often lead the way in making companies and their boards more accountable to shareholders. Make your vote count. The people that run these companies are not gods. They deserve compensation in line with how well the company does for its owners, the shareholders, and no more. Shareholders of the World, Unite and Take Over.
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta's president. She is a graduate of Stanford University.