Compensation Obscenity

I’ve got that ugly feeling that executive compensation is getting out of hand again, although some people think it was never really in hand. The press is running more and more stories of preposterous termination payoffs to fired CEOs, amazing offers to newly recruited executives, and the rise of professional agents who represent executives in salary negotiations.

The numbers resulting from these activities are labeled by reporters as “obscene”-or even worse. The press is having a field day. And everybody knows by now that there is no other subject in the world that can get stockholders riled up as much as “obscene” compensation for the CEO.

The reasons for much of these high blown figures are fairly obvious. The push to put more of the CEO’s compensation “at risk” led to a leveling off of salaries and a sharp increase in the number and quantity of stock options granted. The surge in the economy, with the doubling and tripling of some stock prices, produced unexpectedly high capital gains for a large number of CEOs and senior executives. The new Internet and high-tech companies made dozens of multi-millionaires overnight in shortcut fashion. At the same time, the hot economy created a shortage of executive talent, and companies found themselves in a bidding war to hold and to recruit experienced executives. It’s not surprising that a lot of paychecks went through the roof.

Compensation committees were in a bind. They felt that they had to keep their CEOs competitive (and so did CEOs) and they had to keep their key executives from running off to greener pastures. Some companies were quite successful in doing so. General Electric, for example, gave huge salary packages to its CEO and his dozen or so top executives. But they made equally huge profits and created great stock gains, while the top-producing executives stayed on to keep producing. I have relatively little quarrel with cases like that and neither do the rewarded shareholders.

What gets to me-and to a lot of my fellow compensation watchers-is all the fancy bells and whistles that seem to be part and parcel of today’s compensation programs. I hate to see the following:

•  Absurdly elaborate contracts with all kinds of arrangements for club memberships, personal use of company airplanes, ownership of office furniture, etc. With big cash salary and bonus, do you have to sweat the small stuff?
•  Extravagant termination payouts with no penalty for sub-par performance. Sometimes it seems to pay better to be fired.
•  Low or no interest loans to buy company stock. Where does this stop?
•  Substitution of restricted stock grants for underwater options. Repricing is even worse, I guess.
•  High bonus awards, in stock or cash, granted when competitive corporate performance lagged. This is sinful, but it happens all the time.
•  Writing almost any type of voluminous, hyper-detailed compensation contracts for CEOs that require a battery of lawyers to interpret. Read a few proxy statements and you’ll see what I mean.

What can be done to settle executive compensation down to sensible levels and to common sense terms? Not much right away, probably. Once agents and superstars are in the picture (witness professional athletes’ contracts, if you will), it’s very difficult to return to old, simpler days. Major revisions will have to wait until a significant downturn occurs. But that doesn’t mean that companies have to lose their compensation equilibrium.

I know one thing I would do if I were the CEO or a director of a flourishing corporation today. I would assemble the best talent available for my compensation committee and my executive compensation specialist in my human resources division.

I would put through an intensive training and tutorial program that brings them up to speed on executive compensation programs. I would bring in some creative compensation consultants and ask for some ideas to reformat the company posture. I would challenge the company to come up with the best possible executive compensation program as soon as possible.

You may not bring forth a revolutionary idea that changes the compensation world. But you have an excellent chance of avoiding a too-complicated, difficult-to-understand compensation program that pays its executives too much money for too little results. And you will know you have done the right thing.