Jeffrey Sonnenfeld, Yale School of Management andJoe Bachelder, the Bachelder Firm

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This is a partial transcript from Your World with Neil Cavuto, July 1, 2003, that was edited for clarity. Click here for complete access to all of Neil Cavuto's CEO interviews.

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NEIL CAVUTO, HOST: When it comes to executive pay (search), CEOs clamor to get this guy their corner. Joe Bachelder has negotiated lavish compensation packages for some 23 years now. Joe, of course, is the founder and the senior partner of the law firm that bears his fine name.

But these packages just outrage Jeffrey Sonnenfeld. Jeff is the associate dean at the Yale School of Management.

Gentlemen, welcome.

Professor Sonnenfeld, to you first. You don’t like the trend, do you?

JEFFREY SONNENFELD, YALE SCHOOL OF MANAGEMENT: Well, Neil, it really threatens to sap public confidence and trust in our markets when it seems so unjust.

In the past 20 years, since Joe has been in business -- and it’s not all his fault -- we’ve seen a 4,300-percent increase in CEO pay and not even a doubling of the average worker’s pay and most of that gobbled up through past inflation. It’s hard to justify.

And they’re not even performance based, which is what the Vivendi news reminds us, is even for poor performers, we’re seeing people walking out the door, as we did several years ago with -- like with Michael Ovitz, with extraordinary wages, and this is at least a nice reminder that it’s not just a U.S. problem.

CAVUTO: Well, I tell you you’ve got to be right there, and, Joe, I’ll pick your expertise here. But when the French are upset, there’s got to be something to it, and they’re upset with this Jean-Marie Messier deal.

JOE BACHELDER, THE BACHELDER FIRM: Well, we have yet to see exactly what was involved in the arbitration and the confirmation of the agreement by the three arbitrators in the United States.

CAVUTO: But the bottom line -- you craft a lot of these packages, right? I want to talk to you about it when my contract’s up.


Right now, you know that any smart-thinking CEO today is going to want to make sure he has protections in case he’s booted out because the lifetime of a lot of these CEOs is getting shorter and shorter. So they want a big payout when they leave, right?

BACHELDER: Well, they want to have protection, and part of the economics of a negotiation is the severance. So it is like other aspects of the package, whether it’s salary, bonus, long-term incentives, stock options.

CAVUTO: What do your guys look for most?

BACHELDER: They probably are most interested in the equity portion of a package.

CAVUTO: Even now with the lousy markets, notwithstanding recently?

BACHELDER: Most people have hope in their heart, and I think that there is...

CAVUTO: Yes, but I would think you’d prefer money in your wallet.

BACHELDER: Well, in terms of the potential, options and restricted stock still represent the principal emphasis in negotiations.

CAVUTO: Jerry, I think your argument has been in the past there’s no pay for performance, right? In other words, you just get the easy money. There’s less incentive to work hard when you’re getting a lot of dough, right?

SONNENFELD: Absolutely. If they don’t feel that they’re being held to any measurable standards, then where is justice here? Part of the problem here is that boards are in collusion, as Terry suggested in her package, Neil.

But, also, part of the problem is boards are just weak. It’s great to have Joe Bachelder as their advocate. Sometimes, to the governance gurus, he is set up as Darth Vader, but, heck, he’s a Yale alum, he can’t be that bad.

CAVUTO: Leave it to Yale guys to create this mess. That’s all...

SONNENFELD: Who’s on the other side of the table, though? That’s the trouble. There’s nobody really...

CAVUTO: But, Jeff, when you say performance issues, you’re saying that, in other words, the CEO or the chairman to be has got to be graded on what he brings to the company, and, if there isn’t something like that built into his contract, it’s a bad contract?

SONNENFELD: It’s not built in. Yes, exactly.

Even at Sunbeam, Al Dunlap tried to sue for severance. Happily, that board fought.

Similarly, Linda Wachner of Warnaco -- she got a pittance of what she was looking for in terms of severance.

But, at Tyco, they paid the bad guys a pretty big severance, and it’s hard to understand how the...

CAVUTO: But here’s the problem. And, Joe, maybe help me with this. I mean, when you talk about Gary Wendt, the former GE whiz who ultimately ran aground Conseco, the big insurance outfit, he got this huge bonus. What, was it $25 million up front or something like that, the severance package totaling $72 million-plus. People look at that and say, you know, you’ve got to be close to Jesus to justify this.

BACHELDER: And yet, it’s a relatively free mark, so negotiations are going on. When you bought your house or sold your house, did you pay too much or receive too little? It’s a market.

CAVUTO: It depends whether I bought or sold.

BACHELDER: Right. And very much beauty is in the eye of the beholder, and the fact is that running major corporations, major global corporations involves a great deal of pay in terms of absolute amounts of dollars.

CAVUTO: But, you know, it’s funny.

We’re looking at some of the other severance packages of the Conseco co-founder who also got a good deal.

You know, Jeff, the argument has always been it is a free market, you don’t like it, lump it, this is the reality of the world. Every time we even find companies in hard times, far from getting better, this problem got worse.

Do we just have to get used to the fact that CEOs are always going to get -- at least the big ones -- stratospheric numbers?

SONNENFELD: No, we’re distorting the market. I completely believe in a free market here. Joe’s clients are a market distortion. We’re winding up turning to the same celebrity candidates, the same usual suspects.

If you look at the CEO candidacies the boards look at, when Joe started his business, roughly 7 percent of CEOs were from outside the company. Now it’s close to 40 percent. Boards are bidding up the same outside already-existing CEOs.

CAVUTO: Then, Jeff, why can’t you do something as simple as this: If you leave with the stock tumbling or you leave with the company in some disrepute that you don’t get these great take-away bonuses, let’s say, Joe Nacchio of Qwest, not to say anything that they might be guilty or not of crimes, but to say that they just left on such a bad note and the company is in such a bad way that you don’t get these incredible golden parachutes. What about that?

SONNENFELD: If they had any pride, if there’s such a thing as shame, they would leave without these. The fact that they ask for them coming in would trouble me, if I was on the board. If I was a candidate of Joe’s who’s asking for this, that tells me there’s something wrong with this candidate. There are thousands of others...

CAVUTO: But, Joe, they all ask for it, right? They all ask for it.

SONNENFELD: There are tens of thousands who don’t.

BACHELDER: Yes, but the problem is what does it mean when you say the company’s in bad shape. Suppose the economy...

CAVUTO: Well, in the case of Qwest, the stock is worth a hundredth what it was. That’s a good start.

BACHELDER: Well, you can take a very egregious case. We probably would all agree. But there are 15,000 public companies in the country, and, in negotiating on behalf of CEOs, I can tell you that would be a very difficult standard to apply -- if you leave the company in bad shape, you don’t get your severance.

CAVUTO: You could represent Lucifer, couldn’t you? You could strike a good deal.

All right, Joe. Very good on this subject. I appreciate it.

Jeff Sonnenfeld, you two Yale guys argue another time.

All right. Thank you.

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