Put teeth into pay-for-performance
Many corporate executives uphold a fiduciary management standard, putting shareholders and their employees — and the long-term health of the company itself — ahead of their own interests.
Many corporate executives uphold a fiduciary management standard, putting shareholders and their employees — and the long-term health of the company itself — ahead of their own interests.
Other CEOs, however, are a bit more self-serving, especially in terms of their compensation.
To be clear, I embrace the free market and don’t begrudge anyone’s success, financial or otherwise. In fact, success should be rewarded.
But when executive compensation is grossly out of sync with performance, anyone with a basic sense of fair play and a modicum of intelligence should see that something is terribly wrong.
Consider the example of Rick Wagoner, the former chief executive of General Motors Corp., who left the beleaguered auto company with a $20 million retirement package. Under Mr. Wagoner’s “leadership,” GM lost tens of billions of dollars, took billions in taxpayer-financed aid and cut tens of thousands of jobs.
Then there’s the case of Gregory Curl, the chief risk officer and one of the highest-paid executives at the Bank of America Corp. He was the chief architect of the bank’s ill-fated acquisition of Merrill Lynch & Co. Inc.
Despite being stripped of his title last month, Mr. Curl was awarded more than $9.2 million in stock, most of which will be paid out monthly over the next three years.
At Morgan Stanley Smith Barney LLC, James Gorman, who re-placed John Mack as chairman at the start of the year, reportedly stands to earn about $13 million this year, even though the company posted a loss.
Perhaps $10 million compensation packages are reasonable by Wall Street standards.
But for most of us, such hefty pay seems rather excessive, considering the shaky financial conditions of the companies in question and the role played by the handsomely rewarded executives in those circumstances.
By contrast, consider the action of Ahmad Chatila, president and chief executive of MEMC Electronic Materials Inc., a manufacturer of solar and semiconductor wafers based in St. Peters, Mo.
Two weeks ago, he announced plans to use his $500,000 bonus for 2009 to fund training programs for 450 employees who will be laid off through two planned plant closures this year and next, according to a -filing with the Securities and Exchange Commission.
This amount is in addition to the other training, severance, benefits and assistance, including one year of group medical and dental benefits, and supplemental educational expenses already offered to the affected workers, according to the regulatory filing.
Then there’s Tim Armstrong, the chief executive of AOL Inc. Mr. Armstrong, who took the job last March, turned down a bonus of $1.5 million for 2009, the company reported in an SEC filing this month.
In its filing, the Internet company said that Mr. Armstrong was entitled to the bonus but that AOL’s compensation committee accepted his request to forgo it.
Apparently, Mr. Armstrong felt taking a bonus was not appropriate, given AOL’s struggles to reinvent itself as a content and advertising company.
By their selfless deeds, Mr. Chatila and Mr. Armstrong demonstrate that they know how to lead by example.
Instead of enriching themselves at the expense of their companies, employees and shareholders, these two executives took the long view and put other corporate constituents first.
CEOs who believe in the pay-for-performance model must realize that it’s not a “heads, I win; tails, you lose” formula.
Yes, pay a reasonable — and even generous — amount to those who actually perform. But when performance is subpar, there’s no reason to pay.
Unless CEOs are willing to apply that basic yardstick to everyone, including themselves, they should not occupy the top job.
Jim Pavia is the editor of InvestmentNews.
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