Payouts To Top Executives Prove Hard to Curb
The Wall Street Journal
Monday, June 26, 2006
Investor complaints about executive pay are getting louder
and angrier, but CEOs are likely to keep raking it in for
some time to come. They think they deserve their steep
payouts even when their performance has been far from
stellar. And a majority of corporate directors don't think
executive pay is hurting the economy or their companies'
performance and aren't ready to say no.
Dana Mead, head of Pfizer's compensation committee, for
example, defended CEO Hank McKinnell's hefty salary and
pension package at the company's annual meeting in April.
When one shareholder demanded to know why Mr. McKinnell
received in two days what he as an orthopedic surgeon earned
over the course of a year, Mr. Mead said that Mr.
McKinnell's pay was based on market forces and reflected his
responsibility overseeing 110,000 employees. Disgruntled
shareholders even tried to unseat Mr. Mead and another
director this past April but failed. They did, however,
withhold a remarkable 20% of the vote.
Since Mr. McKinnell became CEO in 2001, Pfizer's shares have
lost more than 40% of their value. Meanwhile, the CEO has
received $79 million in pay during that period and has a
guaranteed pension of $83 million when he retires.
At other companies, directors also have continued to fork
over higher sums to CEOs despite heightened governance
concerns. Last year, total direct compensation for chiefs
-- which includes salary, bonus and the value of restricted
stock when it was granted -- jumped nearly 16% to a median
of $6.05 million, according to an analysis of 350 major
companies by Mercer for The Wall Street Journal. Most CEOs
also received generous pensions, deferred compensation and
Directors think using pay incentives to lure top talent is
good for the economy. A recent survey of directors by
consultant Watson Wyatt found that 65% believe the executive
pay system has "contributed to positive U.S. economic
performance." Their reasoning is that the best chief
executives create jobs and sell products that keep the
But institutional investors, who were surveyed separately,
think a lot differently. Just 22% think the pay system has
helped the nation's economic performance. And some 90% said
top executives are "dramatically overpaid," compared with
61% of directors.
These contrasting views illuminate the problem: Most
directors -- many of them CEOs and retired CEOs themselves
-- still are more aligned with chief executives than with
the shareholders they purportedly represent.
Certainly, boards have become more independent in the past
four years, thanks to accounting scandals at Enron, WorldCom
and other companies, and passage of Sarbanes-Oxley, the
broad corporate-governance act, and other reforms.
Independent directors meet separately from management and
often have divided the jobs of CEO and chairman of the
Yet, because CEOs have influence over who gets on the board
-- the only board slate offered to shareholders is the one
proposed by management -- directors are careful not to
offend them. "Displeasing the CEO hurts one's chances of
being put on the company slate, so directors have an
incentive to support or at least go along with pay
arrangements that favor top executives," says Lucian Bebchuk,
a Harvard University law school professor and co-author of
"Pay Without Performance." "They don't have an incentive to
change those arrangements."
Nothing will change until shareholders gain the ability to
easily replace directors. Call it the fear factor: If
directors knew they stood a good chance of losing their
board seats -- and the prestige and valuable business
connections these provide -- unless they aligned themselves
with shareholders, they might stop forking over so much and
narrow the gap between what CEOs and their managers and
To get there requires changing corporate laws and
practices. As a first step, Mr. Bebchuk recommends that
shareholders gain the power to place director candidates on
corporate ballots and to initiate and adopt changes in
corporate charters. Under current rules, shareholders can
only pass nonbinding resolutions and must wage costly proxy
fights to nominate a dissident director slate.
In the meantime, the pending SEC overhaul of pay disclosure,
expected to take effect next year, will give shareholders
more ammunition to confront board compensation committees.
The new rules will force companies to provide a total
compensation figure for CEOs that gives details about perks,
projected retirement payments, severance and deferred
But even investor pressure might not be enough to get
directors to stop paying big money to attract name CEOs,
says Ira Kay, head of Watson Wyatt's compensation practice.
"They aren't going to come down a lot on the direct pay side
until there's less competition for executives with the
qualifications to be CEOs," he says.
As it is, seasoned top executives are still in demand.
"Board members are reluctant to take a chance on unproven
talent," adds Mr. Kay.
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