The Association of U S West Retirees



Surprise! CEOs Are Still Highly Paid!
By Holman W. Jenkins Jr.
The Wall Street Journal
Wednesday, May 3, 2006

It must be (insert time of day, season or year here) because the air is filled with complaints about CEO pay.  To wit, CEOs are paid too much because they are "greedy."  They are paid too much because their wages are the product of a corrupt bargain with crony boards.  Sacred norms are violated:  The average CEO makes 300 times an average worker's salary.  What is the "right" number and where does it come from?  The Bible?  We'll get back to you.

You could do worse than revisit the case of one Joseph Nacchio, former CEO of Qwest Communications, one of those shamelessly overpaid CEOs of the '90s.  It shows, in the end, that very large CEO compensation is awarded in a logical and deliberate manner because it serves the legitimate interests of those awarding it.

Mr. Nacchio, an executive at AT&T, was recruited to Qwest by the company's founder, Denver billionaire Philip Anschutz.  Mr. Anschutz, a famously shrewd dealmaker, dangled an offer of three million stock options, the explicit temptation being:  Sign away five years of your life and I will give you the chance to become extraordinarily wealthy.

This is the basic transaction behind most "outrageous" CEO pay.  And Mr. Nacchio had the good sense to go where Mr. Anschutz was leading him.  Qwest's stock price soared and Mr. Nacchio eventually exercised options for a pre-tax gain of $250 million.

Now we come to the reason for focusing on Mr. Nacchio.  In 2001, Mr. Anschutz prevailed on him to stay, offering essentially the same deal over again, and Mr. Nacchio sat down with the Rocky Mountain News to explain his compensation.  What followed was a rare exercise in realism about CEO pay.

He noted that several Qwest executives with large stock-option windfalls had already left.  "Look, it's very hard to keep guys and gals who work in the normal corporate structure and then all of a sudden over the period of two or three years, make $50 to $70 million. . . . Most people who make that kind of money will immediately say: 'seen it, done it in the corporate world, I'm going to do something else.'"

"I was faced with the choice:  I either got to leave at the end of five [years], or I have to stay for a substantive period of time. . . . Look, I could go sit on the beach right now and never have to do another day's work."

He added:  "You might say if you want to stay, why don't you just work for free?  I think there are limits to how much you want to do something.  If I did that, then my investors would judge my rationality and everything else I did."

There's a lot here, but suffice it to say, when you hear Pfizer's board being criticized for having guaranteed Hank McKinnell an $83 million retirement payout despite a crummy decade for drug stocks, remember Mr. McKinnell is a rich man and could be on a beach too.

Notice we don't use the language of "deserve" or "worth" or "reward," common in complaints about CEO pay.  These are after-the-fact judgments, and any board that dishes up large pay for performance that's already in the books isn't doing shareholders any favor.  "Pay for performance" is paying for the past, not the future, which is what stock prices care about.

That's why CEO pay is about incentives -- the incentive to commit to the job in the first place, the incentive to make decisions that benefit shareholders.  Should a company go for broke on a new investment project or play it safe?  Should it conserve cash or spend lavishly on customer service and advertising?  Should it pay bonuses to employees or direct the same cash to the bottom line?

A shareholder is hardpressed to make these calls from the sidelines.  Meanwhile, tugging at a CEO's elbow all the time are competing constituents who also want something at the company's expense.  Hence the use of stock options, unabated by controversy and fully supported by valuations in the stock market, to put CEOs in the place of owners when making these choices.  In turn, the market sits in judgment on a CEO's every move, adding or subtracting in a nanosecond a sum from the company's market value that dwarfs even the CEO's pay package.

You can complain, as critics do, that when boards are giving away stock options or any company asset, they aren't giving away something that belongs to them, so what do they care?  Yep, that's also true of the guy who fills the supply closet or authorizes a new roof for the factory.  It's true of the politicians who spend our tax dollars and the charities that dispose of our donations.  "Agency" is a feature of organized life.

None of this means an Enron doesn't happen occasionally.  Very large sums dangled in front of people will make some crazy (and we should note Mr. Nacchio is still fighting insider trading charges related to his Qwest stock sales).  But notice that the average CEO, by the time he or she has spent a working life in one corporate job after another, would not have succeeded without a finely tuned sense of impulse control, a capacity to temper wishful thinking with realism, a capacity for coolness and restraint in dealing with frustration, opposition and risk.

What you get with the typical CEO, a few exceptions notwithstanding, is a seasoned grown-up capable of acting wisely and well under the heady incentives (and dangers) of corporate life.

Rote disapproval has been a feature of the landscape since pundits began noticing executive compensation 20 years ago, but the critics should at least have the courage of their resentment and stop trying to rationalize their disapproval with claims that CEO pay isn't, by and large, an honest product of the marketplace.  High CEO pay exists because intelligent, savvy, self-interested investors and their representatives believe it's in their interest to award high CEO pay.  And for that reason, high CEO pay won't be going away.

Holman W. Jenkins Jr. is a member of the editorial board of The Wall Street Journal and writes editorials and the weekly Business World column.

Mr. Jenkins joined the Journal in May 1992 as a writer for the editorial page in New York. In February 1994, he moved to Hong Kong as editor of The Asian Wall Street Journal's editorial page. He returned to the domestic Journal in December 1995 as a member of the paper's editorial board and was based in San Francisco. In April 1997, he returned to the Journal's New York office. Mr. Jenkins won a 1997 Gerald Loeb Award for distinguished business and financial coverage.

Born in Philadelphia, Mr. Jenkins received a bachelor's degree from Hobart and William Smith Colleges in Geneva, N.Y. He received a master's degree in journalism from Northwestern University in Evanston, Ill., and studied at the University of Michigan on a journalism fellowship.

Mr. Jenkins invites comments to