Today’s New York Times spotlights the rich payouts to failed CEOs, drawing special attention to three CEOs who recently were fired: Carol Bartz of Yahoo, Léo Apotheker of HP and Bob Kelly of Bank of New York Mellon. (See my earlier posts on how these departures were communicated.)
While it may spark outrage, these payouts shouldn’t be a surprise. They were based on employment contracts approved by the board of directors at each company and disclosed in regulatory filings. Eager to have the talent, the boards paid up, as the Times article observes:
“Perhaps the biggest reason that golden parachutes persist is that corporate boards hire superstar chief executives, rather than groom strong managers inside the company for the top job. That gives outsiders a stronger hand to demand all kinds of upfront stock awards and lucrative severance deals when they are hired. So when things do not work out, that “golden hello” turns into a “golden goodbye.”
CEO compensation is unlikely to change until boards demand it. And shareholders will have a hard time influencing board selection now that an SEC rule that would have made it easier to nominate directors was struck down by the US Court of Appeals in July.
Perhaps the most thoughtful perspective on CEO compensation was offered a few years ago by William McDonough, the former president of the New York Federal Reserve Bank, whom I cited in a recent post on risk management. In what must have been one of the most unusual settings ever for a speech by a Fed official, McDonough addressed the congregation at Trinity Church on the first anniversary of the 9/11 terror attack. He used the occasion to ask about the morality of high CEO pay:
“I believe that most American business executives at all levels are believers in and followers of the laws of our country. It is important that we not label as sinners everybody who has been successful because a relative few have been noticeably lacking in virtue. The world depends on the economic leadership of the United States, at least as much as it does on our relative military and geopolitical strength.
I believe there is one issue in particular which requires corrective action. A recent study shows that, 20 years ago, the average chief executive officer of a publicly-traded company made 42 times more than the average production worker. Perhaps one could justify that by the additional education required, the greater dedication, perhaps even the harder work. The same study shows that the average present day CEO makes over 400 times the average employee’s income.
It is hard to find somebody more convinced than I of the superiority of the American economic system, but I can find nothing in economic theory that justifies this development. I am old enough to have known both the CEO’s of 20 years ago and those of today. I can assure you that we CEO’s of today are not 10 times better than those of 20 years ago.”
McDonough might have overstated the CEO-to-worker pay gap based on the data I could find, but he got the trend right. And ten years later, it’s largely unchanged.