Let Corporate Leadership Handle It….if They Will

April 30, 2014

Some might interpret my recent posts as suggesting a preference for government solutions.

I’m equally happy with private solutions. Corporate pay, especially for CEO’s, is a good example. The Board of Directors and the shareholders are certainly the ideal bodies for determining appropriate CEO pay. However, the excesses under current practices have become so egregious that Directors should rightfully fear the government will step in, if they don’t do their jobs. There have been referenda in certain countries to limit the pay of CEO’s. The US has a higher ratio of CEO pay to median employee pay than almost any other country, and government controls could happen here.

A good example of egregious excess is the pay for Marissa Mayer, CEO of Yahoo.  See Steven Davidoff’s analysis of her pay: http://dealbook.nytimes.com/2014/04/29/yahoo-chiefs-pay-tied-to-another-companys-performance/?_php=true&_type=blogs&_r=0

Davidoff reports her base is $1 million. That’s OK. Her bonus is a minimum of $2 million, subject to meeting goals. That’s OK, too.  So, how is it that her compensation at the end of 2013 is estimated at $214 million? That’s not OK. That kind of compensation is way over the top, excessive, unnecessary to motivate or compensate any executive, and it is dilutive to the shareholder equity in the company. It adds to the ire of those concerned with inequality, the advantage of the 1%, and the lost decades to the working class.

Davidoff lays out a mixed record for her two years at Yahoo–revenue was down in 2013 and profits were down in the first quarter of 2014. She has made some promising changes, but it is too early to see how her term at Yahoo will add up.

What’s driving the big bucks is stock options. When Compensation Committees of Boards were faced with challenges over corporate pay, they gradually figured that putting the bulk of potential pay on stock performance was an easy way out of criticism: A CEO would only get the $1 million base and the $2 million bonus if the stock value didn’t go up, and if it did, the CEO would only get a piece of the increase in market value? Either way, the market determined the final amount, not the Board. Sound fair on the surface? Results can’t be blamed on the Board, they figured.

But what if the CEO had little to do with the appreciation in the stock value, as may well be the case with Mayer. She may turn out to be a fabulous CEO, but it’s too early to know that, based on mixed results across the two years. Yet, the stock of Yahoo has appreciated dramatically, primarily as a result of the stunning promise of Alibaba, a privately owned internet giant in China in which Yahoo holds a minority interest, and which may go public soon. Mayer did not negotiate that deal and has little, if anything, to do with the performance of Alibaba.

OK, this case is unusual, due to the unique driver of the stock price. But, there could easily have been a way around that, if the Board had done its job. Any there are many other examples of such stock option driven excesses, without an Alibaba in the mix.

I vote (again) for asking the private sector to do its job–for example, the Board should go back to making discretionary decisions on CEO performance and compensation–take the responsibility back that your role requires. Give Mayer $10 million if you think it right, but not $214 million! Don’t sidestep your responsibility, and don’t complain if you do, when the government or the public step in and compel limits.

Capitalism can work well for our society, but some elements of greed do need to be constrained by the private sector, or the public sector can and will rightfully do that for them.

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