Sunday, April 09, 2006

Overpaid CEOs: Does It Really Matter?

Once again, the issue of CEO compensation is in the headlines. I wrote a piece on this topic here a few months ago. My feelings and thoughts have not changed. However, they have gotten a little more nuanced.

Rather than rewrite what you can read by following the link in the first paragraph, let me address a few aspects of the public outcry over this topic.

First, I do not think it is an appropriate matter for any type of legislative or governmental interference. These are publicly-held companies, with boards of directors and bylaws governing their behavior. The companies in question have stock listed on exchanges where a shareholder may easily dispose of his stake in the firm, if he dislikes the way the firm is managed or directed.

Second, I think this issues is moot for any firm whose total return performance has consistently exceeded or is exceeding the S&P500 index return for a period of five years. When a CEO delivers the goods, who cares how much he was paid? This type of performance is so rare that, if a CEO actually enriches his shareholders, continually, at an above-market rate, those shareholders should be thrilled to pay that CEO very handsomely.

Third, the "issue," as it exists, exists only for those companies whose total returns are either consistently below the index for 5 years or so, or inconsistenly not much different than the index. Simply put, why should anyone pay excessive amounts of compensation for the right to hold a single stock, with its attendant concentration risk, and earn no more than the market return?

But, even here, the culprits are not the CEO. No, the culprits are the board members- particularly the compensation committe members. These snoozing guardians of the corporate treasuries abet the "excessive CEO compensation crisis" by failing to set realistic and appropriate corporate total return requirements for the CEO to achieve in order to enrich himself. For more details, see my post on Jeff Immelt, the overpaid, underperforming CEO of GE.

Realistically, pragmatically, what is the average shareholder to do? Or even, for that matter, the average institutional fund manager to do? As I wrote on a related topic recently, it baffles me why any investor honestly thinks s/he can affect the behavior of a large corporation in which s/he owns shares. Or why s/he should even try. Does it not make more sense to simply sell shares of a poorly-run company, and buy shares of one whose performance, or prospective performance, you prefer?

Thus, my "final" answer is, I think the spotlight being shone on these overpaid loser CEOs is great. The Wall Street Journal's "CEO Compensation" section in yesterday's issue is about as good as it gets. Provide sunshine, full information, and let shareholders make their choice with their investment dollars.

After all, we want free, liquid, fully-informed markets and investors, right? Why should anyone be doing anything but applying the "disinfectant" of fully-disclosed performance and compensation information for the benefit of investors?

Followed to its logical conclusion, I suppose, in a perfect world, a company like, say, GE, which consistently overpays its CEO for poor performance, would see investors head for the exits, and its stock price and total return plunge. Then, ideally, that CEO would be dismissed, a la my prior post guidelines. And if the new CEO got things back on track, s/he would be amply rewarded, and investors would return to hold a consistently-superior performing stock.

So I stand by my earlier recommendations: handsomely reward performers, and fire the already-wealthy underperformers. Pay all the CEOs with less cash and more stock. Make them wealthy by leading a company to consistently-superior total return performance, and nothing less.

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