Is This Year to
Burst CEO Pay Balloon?
By ELLEN SIMON 02.09.07, 6:47 PM ET
Will Robert Nardelli and Henry A. McKinnell do for executive pay
what Enron Corp. did for corporate governance? Just as Enron Corp.'s
meltdown led to tougher corporate governance regulations, the
eye-popping packages those executives received when they exited CEO
jobs at Home Depot and Pfizer have caused everyone from President Bush
to professional compensation consultants to suggest runaway pay needs
to be reined in.
The topic is shaping up to be the No. 1 issue at this year's annual
meetings of public companies.
Investor activists are buzzing about potential solutions, including
shareholder advisory votes on executive pay packages and the end to
provisions that give executives huge windfalls when companies are
sold. And a handful of companies have shown a new willingness to talk
to advocates about pay changes.
"There's a sort of silver lining to the whole Nardelli, Home Depot
thing," said Chicago-based compensation consultant Donald Delves. "At
least the shareholders finally spoke up."
Nardelli left Home Depot Inc. in January after months of
shareholder complaints about his pay and the lagging performance of
the company's stock versus home improvement competitor Lowe's Cos. And
McKinnell's exit from Pfizer Inc. in July came 19 months earlier than
expected in part due to growing shareholder anger about what had been
disclosed about his lucrative retirement package.
But the true shock came when the details later emerged about just
how large their severance deals were: Nardelli's was valued at about
$210 million and McKinnell's came to almost $200 million, according to
company filings with the Securities and Exchange Commission.
The packages were enough to warrant attention from Bush, who said
in a speech on Wall Street last month that corporate board members
must step up to their responsibilities. "You need to pay attention to
the executive compensation packages that you approve," he said.
Rep. Barney Frank, D-Mass., chairman of the House Financial
Services Committee, is expected to introduce legislation on the issue.
Frank said in a January speech at the National Press Club that high
CEO pay is "not just a matter of envy. It has reached a point where it
has some macroeconomic significance."
Frank pointed to research done by Harvard professor Lucian Bebchuk
showing that compensation of the top five officers at the country's
public companies between 1993 and 2002 totaled about $250 billion -
nearly 10 percent of aggregate profits. CEO pay grew by a median 11.29
percent in 2005, according to The Corporate Library, which tracks
governance, compensation and performance.
Bebchuk, co-author of the book "Pay Without Performance: The
Unfulfilled Promise of Executive Compensation," has become a
frequently-cited source for information in proxy pay proposals. He's
also started filing proposals himself on director pay at companies
including Walt Disney Co. and Northrop Grumman Corp.
The American Federation of State, County and Municipal Employees
has submitted "say on pay" proposals, asking for a nonbinding
yes-or-no shareholder vote on pay packages at companies including
Citigroup Inc., Wachovia Corp., Ingersoll-Rand Co., Merrill Lynch &
Co. and Countrywide Financial Corp.
"I think it's a rare board that's going to ignore it's owners,"
said Timothy Smith, director of socially responsive investment at
Walden Asset Management, which manages about $1.5 billion.
About 10 companies, including Pfizer, Intel Corp., Bristol-Myers
Squibb Co., Schering-Plough Corp., American International Group Inc.,
JPMorgan Chase & Co. and Colgate-Palmolive have formed a working group
with AFSCME and Walden to discuss shareholder approval of pay
packages. They met Friday at the offices of TIAA-CREF, which manages
Such a system, used in the United Kingdom, would not give
shareholders a vote on pay. But it would allow them to bring
nonbinding confidence or no-confidence vote on reported executive pay,
letting shareholders either ratify or say no to the pay package an
executive has already received.
"Only a handful" of pay packages in the UK have not been approved
by shareholders, said Jeffrey N. Gordon, a law professor at Columbia
University at a Thursday presentation to the New York Society of
Security Analysts. One package that wasn't approved was from
GlaxoSmithKline PLC, where shareholders were particularly upset about
a "golden parachute" package for the CEO.
"In response to shareholder pressure, it was cut by two-thirds,"
Other solutions are coming from companies themselves. While Ben &
Jerry's is the best known example of a company where executive pay is
a multiple of employee pay, DuPont Co. has used the same standard for
the last decade, with the target cash compensation for the CEO set at
about twice that of an executive vice president. The company also pays
modest bonuses, considering its size.
The practice started under CEO Edgar S. Woolard, who retired in
1995. In a video message posted online, he pleaded with executives to
ratchet down pay as a way to restore public trust in corporate
leaders. He argued against what he calls the "myths" used to justify
high CEO pay, including the idea that CEO pay is driven by
"To that, I say, 'Bull,'" he said. "CEO pay is driven by the
outside consultant surveys and the fact that your CEO in your company
has to be at least in the top half and maybe in the top quartile."
DuPont did not make Woolard available for interviews.
More than anything, this is an issue for corporate boards, said
John C. Wilcox, senior vice president and head of corporate governance
at TIAA-CREF. "We don't want to micromanage the internal decisions of
the company's management."
One reason Home Depot's Nardelli got the rich pay package he did
was because his hiring was a "hail Mary pass" by a company that was in
"dire straits," said Ken Bertsch, executive director and head of
corporate governance at Morgan Stanley Investment Management, at an
event Monday hosted by Institutional Shareholder Services.
By contrast, companies that grow their own talent avoid the CEO
star search - and the major league pay that comes with it. Michael L.
Eskew, CEO of United Parcel Service Inc., has been with the company
since he graduated from Purdue University's industrial engineering
program in 1972. He earned about $2.5 million in 2005, outside options
- and the 33,993 shares underlying his options aren't staggering.
As boards set goals for pay, they need to look harder at
"This is pretty simple stuff," said Delves. "If you want pay at the
75th percentile, you better have performance in the 75th percentile.
It's not hard to figure out."
Copyright 2006 Associated Press. All rights reserved.