March 9, 2008

Called on the carpet

Congress has been grilling subprime mortgage company CEOs this week, forcing them to answer a simple but cogent question: Why, when their companies were losing money faster than Britney Spears was losing her marbles, did they continue to haul in absurd amounts of compensation?

Case in point: Angelo Mozilo, CEO of Countrywide Financial, made $120 million last year, while his company lost $703.5 million.

Now, maybe I'm naive, but if your company's net income is a negative number, you ought to stop the bleeding by making some radical moves. If Mozilo had deigned to get by on only $20 million last year, and given the other $100 million back to the company, he could have reduced losses by fifteen percent. I'm sure some of his top execs could have chipped in a little, too.

Not that a reduction of red ink would have prevented the over-reached home buyers from foreclosure. But it would have earned the CEO some points with shareholders, who are now more eager than ever for some compensation reforms.

Yesterday, Business Week posted a story on the congressional hearings. The article quotes Nell Minow, co-founder and editor of The Corporate Library, an independent research firm, who told the House committee, "If you make compensation all upside and no downside, that will affect the executive's assessment of risk. It will make it clear to him that he can easily off-load the risk onto shareholders. It's heads they win, tails we lose."

What troubles me most about this (other than the fact that CEOs are now making a record high of about 600 times more than the average U.S. worker, according to Reuters) is that many of us have spent the last several years—if not decades—issuing warnings about excessive CEO pay.

For example, in a 2002—yes, that’s six years ago, right after the Enron debacle—report on the crisis in corporate governance, Business Week had this to say:

“Management guru Peter F. Drucker has long warned that the growing pay gap between CEOs and workers could threaten the very credibility of leadership. He argued in the mid-1980s that no leader should earn more than 20 times the company's lowest-paid employee. His reasoning: If the CEO took too large a share of the rewards, it would make a mockery of the contributions of all the other employees in a successful organization.”

Since Drucker made this point twenty-some years ago, why do we still not have a solution to the problem of corporate boards stuffing money into the pockets of CEOs?

Thanks to the diligent work of the Financial Accounting Standards Board, companies are now required to report stock options as an expense. Yet obviously there is still work to do, because as Minow noted, there is no downside to CEO failure.

Most of use are paid when we do OK, given bonuses or non-cash awards when we do well, and punished (if not fired) when we do poorly. CEOs should be no different.

Some in Congress are characterizing these hearings as a search for a scapegoat in the subprime meltdown. Perhaps they are. My only complaint about the hearings is that they didn't come sooner.

Quote of the day from Forbes: "No man is really honest; none of us is above the influence of gain." —Aristophanes

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