McGillUniversity professor Henry Mintzberg wrote a great article November 30 in the Wall Street Journal suggesting big public companies shouldn't pay executive bonuses. It was as if the professor was reading my mind. Especially the part where Mintzberg says, "Eliminate bonuses. Period. Pay people, including the CEO, fairly. As an executive, if you want a bonus, buy the stock, like everyone else. Bet on your company for real, personally." I've been preaching this going on two years now. Despite an abundance of evidence that these bonuses do little for a company's fortune, corporate boards continue to dole them out like candy. Reading the comments online about Mintzberg's article tend to paint the man as some sort of "Commie Pinko." The fact is he's spot on and I'm going to demonstrate this fact using Forbes' annual list of CEO compensation. Maybe then, investors will realize how silly their silent acceptance of this abhorrent practice really is.
Forbes' annual list of CEO compensation has an efficiency rating, which takes into account the six-year return of a company's stock in relation to its CEO's total compensation over the past five years. The lower the better. Number one on the list in 2008 was Terra Industries (NYSE:TRA) CEO Michael Bennett, who made $20.78 million in the past five years while his company's stock has increased 386% and stands to appreciate further as it fights off an unwanted advance from CF Industries (NYSE:CF). Last on the list at 179th is none other than embattled, soon-to-be gone Bank of America (NYSE:BAC) CEO Ken Lewis. His pay over the last five years was $147.5 million while his company's stock lost 66% its value. Are you convinced yet? Don't worry, there's more.
Top Five CEOs
|Company||CEO Pay - Past 5 Years||5-Year Return to Dec. 2/09|
|Terra Industries (NYSE:TRA)||$20.78M||386%|
|C.H. Robinson Worldwide (Nasdaq:CHRW)||$28.22M||113%|
|Reliance Steel (NYSE:RS)||$18.17M||107%|
Below Average Compensation
Without getting into the specifics of each CEOs pay package, most non-founder executives receive at least half of their total annual compensation in stock grants and awards. Take Michael Bennett for example. Terra lists his total compensation in 2008 as $5.4 million, but Forbes goes with $10.47 million. This is because Terra's expense is the lower figure while Forbes' higher number is what he actually made from those awards. Even for reasonably paid executives like Bennett, these awards end up being the gift that keeps on giving, and that's where Mintzberg sees a problem. A better solution would have been to pay Bennett $4 million a year for the past five years' service with no bonuses and a provision in his contract to be able to issue a one-time gift of stock (board approved of course) should he leave on good terms, regardless of the reason. We tip handsomely for good service. Why shouldn't we do the same for a job well done? The worst case scenario: A CEO leaves early, cashes in on his or her exit pay and the company finds another person to head up the company knowing the previous person left the company in excellent condition.
Bottom Five CEOs
|Company||CEO Pay - Past 5 Years||5-Year Return to Dec. 2/09|
|Bank of America (NYSE:BAC)||$147.50M||(66%)|
|General Electric (NYSE:GE)||$70.93M||(55%)|
|Hartford Financial Services (NYSE:HIG)||$77.86M||(62%)|
|Boston Scientific (NYSE:BSX)||$49.11M||(76%)|
Above Average Compensation
Only one of five (Haliburton CEO David Lesar) on this list of infamy was able to deliver any shareholder value, generating a 50% return versus negative 7% for the S&P 500. That's the good news. The bad is almost any executive worth his salt could have done what Mr. Lesar did. I would bet all my worldly possessions that if you paid one of the men on the first list half the $117.6 million that Lesar earned over the past five years, they would have delivered greater returns. Mintzberg's article explains why this is the case. It's because compensation is the last thing that should drive true leaders. If you have to throw excessive amounts of compensation at someone, their greed will get in the way of good judgment. That's just human nature.
Overpaid executives across this country are cringing at the thought Henry Mintzberg is on to something. Unfortunately, most investors aren't that smart. We'll continue to believe that CEOs alone make or break a company's future and that the thousands of employees that execute the top dog's vision (or lack thereof) are simply cogs in a wheel. I sure hope not. (For additional reading, check out Evaluating Executive Compensation)
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