The Association of U S West Retirees



A Gathering Consensus on CEO Pay
By Alan Murray
The Wall Street Journal
Wednesday, March 15, 2006

What do super-investor Warren Buffett, Florida Gov. Jeb Bush and labor boss Gerald McEntee have in common?

Not much, except this: They all believe executive compensation in the U.S. has gotten out of hand.

The roughly $185 million that North Fork Bancorp Chief Executive Officer John Kanas may pocket for selling his company to Capital One is just the latest cause for outrage.  At least in his case, it's a reward for a job well-done.  More galling are payouts to people who were booted -- former Morgan Stanley chief Philip Purcell, who was given $44 million plus a pension, or the fired chief of Hewlett-Packard Co., Carly Fiorina, who was given more than $21 million.

"Forget the old maxim about nothing succeeding like success," wrote Mr. Buffett in this year's letter to his shareholders.  "Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure."

Recognizing the problem, smart companies are increasingly turning to "pay for performance."  But even that approach has its pitfalls.  Performance measures are seldom made public -- for competitive reasons, companies say -- and are open to manipulation.

Take the case of Home Depot CEO Robert Nardelli, quickly becoming a favorite target of critics of excessive pay.  A footnote in his company's 2004 proxy statement says his long-term incentive pay will be calculated by looking at "total return to shareholders over the three-year performance period" and comparing that to "an established peer group of retailers."  By that measure, he has bombed.  Home Depot's stock has fallen since he took over in December 2000; meanwhile, rival Lowe's shares have soared.

But in last year's proxy, the footnote changed.  Mr. Nardelli now gets his incentive pay if the company "achieves specified levels of average diluted earnings per share" -- a measure by which Home Depot looks far more successful.  Shareholders may not be better off, but Mr. Nardelli is.

"It is in the shareholders' best interest for the company's CEO to be focused on such factors as driving operating performance, which is believed to ultimately create shareholder value," Home Depot said, adding:  "Mr. Nardelli's compensation is consistent with the company's philosophy of attracting and retaining the highest performing executive leadership."

In fairness to Mr. Nardelli, who trained at General Electric, he has by many accounts done a good job cleaning up Home Depot and boosting its profit margins.  Colin McGranahan, an analyst at Sanford Bernstein, says that while shareholders may not have gained under his tenure, they would have been worse off without him.

For that, he deserves a decent living.  But does he really deserve last year's total pay of $27 million-plus, including several million dollars to cover tax payments on a forgiven loan?  His board may think so -- though it's worth noting that the board includes Home Depot co-founder Ken Langone, who headed the New York Stock Exchange's board compensation committee that decided Dick Grasso's pay.

Consider this:  Before coming to Home Depot, Mr. Nardelli lost out to Jeff Immelt in the competition to run General Electric.  Now he takes home a bigger paycheck than Mr. Immelt.  Since joining Home Depot, he's underperformed rival Lowe's.  Yet he makes more than Lowe's CEO.  Little wonder he leads the hit list of overpaid CEOs assembled by Gerald McEntee's American Federation of State, County and Municipal Employees.

Many CEOs think that we ink-stained wretches of the press feel underpaid for our brilliance and wallop their pay packages as a result.  They're half right.  But outrage is spreading far beyond the usual labor unions, liberal activists and their journalist allies.  I talked on Monday to Coleman Stipanovich, executive director of the Florida State Board of Administration, which manages more than $150 billion in retirement funds.  His chief trustee is Republican Gov. Jeb Bush.  He says that during his review this year, "the governor specifically brought up executive compensation, and said he is irate about what he sees going on."  As a result, Mr. Stipanovich is now developing his own hit list.

Change is under way.  Boards are getting tougher.  They now require compensation consultants to report directly to them, not to company management.  Proposed Securities and Exchange Commission rules requiring clearer disclosure of executive compensation may help, too.  And the lavish separation packages given to Mr. Purcell and Ms. Fiorina were the exceptions last year, not the rule.

But change may not be happening fast enough to stop the gathering opposition.  If the pace doesn't quicken, companies may find it forced down their throats.

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