Clueless on CEO Pay
By The Associated Press
New York Times
Wednesday, January 31, 2007
NEW YORK (AP) -- Shareholders worried about runaway
executive pay are likely to be stunned by the findings of a
new study that shows many board directors still have no idea
how much their CEOs would collect if they retire, are fired
or bought out.
Board members also acknowledge they are struggling to rein
in bloated executive compensation, but are counting on
investors to lead the cause to knock it down.
Those conclusions aren't a decade old, but are part of a
recent survey from the consulting firm
PricewaterhouseCoopers and the Corporate Board Member
magazine, which culled responses of more than 1,300
directors at U.S. companies. Its bottom line: Directors
still don't have as much control over corporate dealings
that many believe is needed to curb super-sized
This truly is shocking. Directors' primary duty is to
represent the interests of shareholders, and it's fair and
logical to expect them to take charge more directly
following the rash of corporate scandals in recent years.
But the dynamic in the boardroom is far from perfect. While
more boards are independent of management, there are still
plenty of cases of directors using flawed judgment or
kowtowing to demanding executives who are pushing their own
The list of such behavior runs long. As the housing market
swooned, the board at mortgage lender Countrywide Financial
Corp. gave the CEO $10 million in retirement pay even though
he wasn't retiring. Directors at Caremark Rx Inc. approved
a takeover by CVS Corp. that will give them job security and
provide some with severance payouts. Boards have
rubber-stamped incentive pay for executives even when stock
or earnings performance has lagged.
Shareholders are often left wondering how such things could
go on. This new study gives some telling insight.
Part of the problem, it seems, is that boards are still
controlled by CEOs, with 50 percent of directors surveyed
saying that board leadership flows from the company's top
executive who is also board chairman. Those individuals,
therefore, set the agenda as well as the flow of information
at board meetings and among members.
More surprising is that directors don't want that to change
-- even though there has been a push throughout corporate
America to have an independent board chairman at the helm.
Only 8 percent of directors say that they would like more
boardroom control and 59 percent say that they don't want
the chairman position to be an independent director.
When asked what would be the worst position that a board
could find itself in, only 4 percent said that it would be
giving an executive a $10 million bonus even though the
stock price is lower for the second year in a row. Nearly a
third thought investigations over insider trading would put
them in a more compromised spot, while 27 percent said
losing the CEO without a succession plan.
In the area of compensation, two-thirds of responding
directors believe that U.S. company boards are having
trouble controlling pay. Separately, a third believe that
stockholders are the group most likely to get pay pared
But it is hard to reduce pay when the directors themselves
don't know how much they've even agreed to pay executives.
Less than half of those surveyed said their boards use tally
sheets to add up total compensation, and about one in five
directors said that they didn't know what the CEO would
collect if he or she is terminated, retires or should there
be a change in control.
Such findings help explain how boards often find themselves
in the hotseat. The directors at Home Depot Inc. learned
that the hard way.
They faced intense criticism in recent years for paying
former CEO Robert Nardelli about $25 million a year in
compensation, excluding the potential value of stock
options. He got that even though the home-improvement
retailer's stock price lagged during his six-year tenure.
And when the furor over his pay led to his departure in
early January, his severance totaled $210 million.
With their actions now under a microscope, they were far
less generous with his successor. New CEO Frank Blake could
earn as much as $8.9 million a year in total compensation.
He will received a base salary of $975,000 and will get the
rest if he meets the board's stock and earnings performance
goals. In addition, Blake's compensation arrangement does
not provide for payment of severance upon termination.
Home Depot's board made such changes because it was up
against a wall. Other directors have yet to see such
urgency, to the detriment of every shareholder they
Rachel Beck is the
national business columnist for The Associated Press. Write
to her at rbeck(at)ap.org