Pay for performance vs. pay for failure, as CEOs paid millions to lose billions
There could be an opportunity to tweak the way we pay CEOs of big public companies. I hope this doesn't sound too harsh, but when you consider that the average 2008 compensation for the 10 highest paid public company CEOs was $40.7 million while their companies lost half of their stock market value -- or $30 billion -- I wonder whether some change may be in order.
In 2008, we put a big exclamation mark on what I hope is the end of an eight-year sentence of stabbing common shareholders in the back. Of the 10 highest paid CEOs, here are the four who destroyed the most stock market value while getting well above average pay. The companies are listed in descending order of the percentage destruction in stock market value, along with the CEO's 2008 compensation and loss in stock market capitalization:
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Citigroup (C) paid CEO Vikram Pandit $38.2 million while its stock fell 78 percent, destroying $124 billion in stock market value
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Motorola (MOT) CEO Sanjay Jha made $104 million while overseeing a 75 percent stock plunge, which wiped out $27.9 billion in stock market value
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American Express (AXP) CEO Ken Chenault made $28.6 million while his company's stock fell 65 percent -- slashing $38.5 billion in shareholder value
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Ebay (EBAY) CEO John Donahoe got a cool $24.4 million as eBay stock lost 60 percent of its value, costing shareholders $26 billion
To be fair, two of these companies actually made a profit -- in 2008 American Express earned $2.7 billion and eBay made $1.8 billion. But the CEOs who got the higher pay worked for big money losers -- Citi lost $27.7 billion and Motorola's net loss was $4.2 billion.
It's hard to see how investors can be encouraged to invest in common shares as long as the directors -- whose CEOs serve on each others' compensation committees -- are acting in their own self interest to boost their compensation regardless of stock market performance.
But CEOs are people and people will do what you pay them to do. If you pay for failure, CEOs will fail.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
4-03-2009 @ 1:30PM
Bill said...
So, should CEOs be responsible for stock price performance or for company performance? My vote is for company performance. Mr. Cohan seems to be saying CEOs should be held accountable for stock price. I say that's only valid if the stock price suffers due to poor performance of the company due to criminal and fraudulent activity or failing to adapt the business to market conditions. I think part of the problem is that too many CEOs (and boards) have been too focused on their stock's price and have disregarded the fundamentals of running a profitable, honest business.
If you run a sound business the stock price should reflect it, in theory. Unfortunately it has been investors' childish demands for soaring stock prices and their ignoring of stable slow-growth companies' stock that has motivated some CEOs to put too much emphasis on getting the stock price up.
I certainly agree with the point about the excessive pay for CEOs whose companies are unprofitable. And does anyone really deserve to make $10 million? Why is not $5 million enough to make any "employee" with no personal liability for the company happy?
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4-04-2009 @ 12:43AM
Joshua Ballard said...
Realistically speaking, the stock price is not necessarily reflective of the underlying assets, namely the business operations themselves.
Peter seems to be blaming Citibank, et al. for the massive imbalances between intrinsic value and perceived value in the marketplace.
Is it the fault of Citibank and its management that Mark-to-Market applications on a dead market have "lost billions".
Unrealized losses are not real losses, but accounting losses. These same losses will turn into record annualized profits when there is revaluation of the asset class. The cashflow from operations will unfortunately still be the same as ever.
Stop blaming CEOs and their bonuses for global market forces acting irrationally and/or irresponsibly.
Insurance companies failed to evaluate risk appropriately, ratings companies failed in their analysis of underlying value and risk, and people placed too much faith in both by purchasing fundamentally weak CDOs on the basis that their insurance would kick in if it went pear shaped.
Those same shareholders would sue executive management for not buying into the CDO market if they didn't "see the opportunity" that was (apparently) sufficiently hedged and insured
Let them keep their bonuses and their pay.
It is the problem of shareholders doing business to step up and change the conditions of employment and bonuses.
Don't blame the management for doing what they were contracted and obligated to do. If there was clear violation of law or severe abuse of position for personal benefit...then go bananas on them.
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