Comments on: Runaway CEO compensation

By: 6 AM Pacific » Blog Archive » More insiders being recruited as CEOs

6 AM Pacific » Blog Archive » More insiders being recruited as CEOs — Sat, 05 May 2007 01:55:23 +0000

[…] A few months back I had written on Runaway CEO compensation after the Bob Nardelli/Home Depot fiasco. My sole recommendation on the way out of the CEO compensation mess was - better succession planning. […]

By: Torrance

Torrance — Mon, 09 Apr 2007 01:17:39 +0000

There’s a wicked commentary about CEO compensation at:

http://cantankerousconsultant.blogspot.com/2007/04/save-salary-movement-begun-by-corporate.html

By: Basab

Basab — Sun, 04 Feb 2007 03:11:35 +0000

Rosen, there are a couple of differences between top athletes and CEOs.

One, the evaluation of an athlete’s performance and contribution to success is much easier to establish compared to a CEOs. In the latter case there are issues of company performance versus market, versus industry peers; CEO contribution versus leadership team’s; mistakes of the past affecting current performance etc. etc.

Two, the athlete’s ‘price’ is set in a true market. The market for CEOs has too many flaws. Crony boards, too few candidates, the need for secrecy in negotiations etc. etc.

It’s a tough problem. That’s for sure.

By: Rosen Sharma

Rosen Sharma — Sat, 03 Feb 2007 20:49:04 +0000

To take a contrarian point of view. Numbers like 210M are blown out of proportion by news media. The pressures on a CEO are very different than those on any employee. When CEO’s are recruited from outside they dont know what they are walking into. There are always skeleton’s in the closet.

Lets take an example of a a NFL linebacker, 10-15 years career length. They are done after that. How much does the best player make these days over that 10 years … 100M maybe? Michael Shumacher was making about 100M/yr. Why? Because a short playing career and the risks involved have to be put into perspective of what you have to do for the rest of your life.

Now take high profile job like CEO of Home Depot. What is the average CEO life time? 5 years? If they fail because of all the skeletons in the closet? Who compensates for the rest of the working career? Can Fiorina get another job as CEO? Very few (Eric Schmidt) get a second shot?

While it seems excess, from my standpoint there is more to the story than the media blows up.

Rosen
http://think-smarter.com/rosen_sharma/

By: pushpa

pushpa — Wed, 10 Jan 2007 14:56:28 +0000

To add to your question as to why such a contract was signed off by homedepot, Bob Nardelli was also one of the blue-eyed boys of Jack Welch. When Bob couldn’t make to the top post, Jack welch himself used his Guanxi(connections/network) to help out Bob.
I just happened to read an article in chinese weekly and found this bit. Chinese are normally accused of using such networks in their businesses, but its no different in the occidental world either.

By: Shreyasi

Shreyasi — Tue, 09 Jan 2007 11:53:57 +0000

Basab,
Good to see that you have taken your readers’ complaint and have responded to all of them. Although for me, your reading the comment is good enough.
On the topic, I think the issue of choosing the leader and the successors is much more potent in India today than developed economies because we are growing so fast. At times it looks like this:there are a lot of us forming the base of the pyramid and then there is a huge void with a few insightful leaders at the top. Which only means that we haven’t been able to plan enough for the not-so-far future. I suppose GE (and in India Infy)became so well respected because of their talent management processes.
I agree with you that succession planning is always not the option. However it might be the preferred one!

By: Basab

Basab — Mon, 08 Jan 2007 14:13:29 +0000

Krish, over-the-top CEO compensation contracts are not illegal, at least not yet. The SEC therefore has nothing to do here. Only enlightened directors and alert shareholders can change things.

I agree with your point that there are many situations when succession planning does not give you the right CEO candidate. My point was that if just a few more companies found their CEOs inside, it might deflate the demand for superstar CEOs just that little bit required to reform things.

Shashikant, according to a WSJ article by Herb Greenberg, GE does not have employment contracts for the most part with its CEO and top execs. I attributed this to their success at succession planning and not having to go out for a CEO. This doesn’t mean that they don’t have busloads of options and competitive CEO comp. Just that they serve at the will of the board and if they get fired for poor performance, GE shareholders will not be picking up the tab for any ‘terminated without cause’ clauses.

By: Shashikant

Shashikant — Mon, 08 Jan 2007 06:06:00 +0000

Interesting post, Basab.

I was under the impression that only the shareholders of Home Depot got a raw deal. But, companies (like GE) building exit barriers for their top execs is news to me. In effect, even the GE shareholder are getting a bad deal.

May be, it is not exaggeration when Philip Greenspun writes this.

http://philip.greenspun.com/materialism/money

“Jack Welch in Straight from the Gut proudly states that during his 20 years as General Electric CEO the “employees”, by which he means
himself and some other top managers, went from 0% to 31% ownership of GE. Rephrased, Jack and his golf partners stole 31% of GE from the investors who owned the company in 1980. What’s more, thanks to
accounting rules that enable unlimited stock option grants without any charge to earnings, none of this had to be reported in financial
statements.”

By: Krish

Krish — Mon, 08 Jan 2007 05:31:52 +0000

Yes. One has to read between the lines to import the full substance in any media story. Not to go to bed with the view that CEOs get vested with “heads I win, tails you lose” option. The “very ethics” behind fat severance packages to CEOs are being questioned by the Regulators and even by media. Clarifying it-is-not-entirely-true seems to be the rationale behind this post.

The SOX Act has provisions for pre-approving a CEO compensation for public corporations. What was SEC doing with Home Depots annual filings…? Were the disclosures on CEO’s contract terms not adequate, they have some good reasons. But then the erring management and the corporation can be taken to task separately and the whole appointment could be annulled. Had it not happened before ?

Succession planning is of course a good measure. But, it doesn’t quite measure up if there’s a paradigm shift in the way industry operates or the flex in market dynamics. Then you begin to look for someone outside who’s already in tune with it. And then one should also factor in “familiarity breeds contempt” phenomenon and the avoidable murmurs that go with when you classify just one as first among equals. [ a la Vivek Paul at Wipro ]

or am I missing something here…?

By: Basab

Basab — Mon, 08 Jan 2007 03:07:10 +0000

Good catch, Sachin. I am in general prone to do the ‘he/she’ or ‘they’ bit, but sometimes it gets in the way of getting your thoughts down quickly, and I think I’ll come back and fix it. This time, I didn’t. Guilty as charged.