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
"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
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
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
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.
--Are CEOs overpaid?
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