Surprise! CEOs Are Still Highly Paid!
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
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
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
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
ABOUT THE AUTHOR
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
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