May 2013
»
CEO Compensation Controversy
The growing divide between the “haves” and “have-nots” has provoked public discussions about the need for tax reform, the stubbornly high unemployment rate, and the effects of wage stagnation. But one position for which the compensation has not stagnated is that of the CEO.
CEOs have faced substantial criticism for the disproportionately large slice of the compensation pie that they receive, as compared to the typical worker; the CEO of a Standard & Poor's (S&P) 500 company in 2012 made approximately 354 times the wage of an average U.S. worker, according to the AFL-CIO (“CEO-to-Worker Pay Gap in the United States,” http://www.afl-cio.org/Corporate-Watch/CEO-Pay-and-You/CEO-to-Worker-Pay-Gap-in-the-United-States). Is the work of a CEO really worth that much more money?
Some might argue that companies need to pay CEOs well to recruit and retain top talent, or that CEOs deserve what they're paid because of their performance. But the numbers tell a different story. The CEOs who presided over some of the largest corporate failures in recent history were extremely well paid, such as Richard Fuld (Lehman Brothers), Bernie Ebbers (Worldcom), Kerry Killinger (Washington Mutual), Kenneth Lay (Enron), and Stanley O'Neal (Merrill Lynch). So what accounts for such irrational business decisions? Perhaps it's the undue influence that some CEOs exert over their boards—the same boards that decide the CEO's employment terms and compensation package. Isn't this a conflict of interest?
A Global Perspective
The upward surge in CEO pay is not as prevalent outside the United States, and the compensation for CEOs of comparable-size companies in other countries generally doesn't compete with that of U.S. CEOs. Yet, this issue has received more attention globally than domestically. For example, the Swiss supported a binding shareholder vote on pay; the French are moving to limit or ban enhanced retirement packages, known as “golden parachutes”; and German Chancellor Angela Merkel recently indicated her support for tighter regulations on executive pay. The best we could muster in the United States was passing a “say-on-pay” rule that provides for a nonbinding shareholder vote on executive compensation.
Walk-Away Packages
Executive compensation packages aren't limited to the cash and perks CEOs receive while they're in the C-suite. GMI Ratings, a global research firm, released a report in January 2012, “Twenty-One U.S. CEOs with Golden Parachutes of More Than $100 Million” (http://origin.library.con-stantcontact.com/download/get/file/1102561686275-69/GMI_GoldenParachutes_012012.pdf), that calculated the value of these “walk-away” payments, including final-year salary and bonuses, with perks and benefits; stock values that vested during the CEO's last year; cash and perk severance amounts; stock values that did not lapse as a result of termination; retirement plan benefits; other deferred compensation; and excise tax gross-up payments. Some of the CEOs named in this report retired, whereas others were terminated, but all received generous packages for their time with their organization. Even Thomas E. Freston of Viacom, who was fired after only nine months as its CEO, received more than $1 million as his final payout.
Legislative attempts to address the issue have not been effective. For example, in 1984, Congress implemented a 20% excise tax on severance exceeding 2.99 times annual compensation; consequently, many companies now just pay the tax on behalf of the executive.
Cracks in the System
Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 legislates disclosure of the ratio between CEO compensation and that of the average employee; however, implementation of this law cannot move forward until the SEC issues new rules. And although securities laws require public companies to disclose the amount that a CEO would be paid for a walk-away package (based upon the current employment contract), broad guidance by the SEC has led to significant valuation differences—or, perhaps more to the point, it has allowed companies to play fast and loose with the rules.
A good example of this is the retirement package that General Electric (GE) disclosed for former CEO John F. “Jack” Welch Jr. After he retired, Welch's divorce settlement subsequently revealed benefits that had been obscured in GE's public filings—a total package valued at more than $417 million. And some complain about the pensions for our teachers, firefighters, and police officers!
As always, I welcome your comments.
The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.