Tuesday, January 3, 2012

A Tale of Two CEOs: Shades of Gray in Executive Pay

I'm predisposed to be of two minds in debates about economic issues. On the one hand, I've founded several companies and witnessed first hand the incredible power of competition as a driver of innovation and value creation. On the other hand, I grew up in a family of compassionate activists who devoted much of their lives to issues of social justice. I can't help seeing both sides of most issues.

For example, I see no reason a company shouldn't be allowed to pay its top employees as much as it wants. When cronyism can be kept at bay, such pay will tend to reflect profits and performance in an appropriate way. However, I also believe that the fortunate recipients of these hefty paydays should have the good grace not to complain about significantly higher tax rates.

However, I am as outraged as anyone that HP is paying Leo Apotheker a severance package worth roughly $33 million. Apotheker presided over a near-halving of the company's value during less than a year as CEO. There is no conceivable sense in which he is being paid for performance; he is being taken care of by his cronies, who would expect the same if the situation were reversed.

If I were an HP shareholder -- which I'm not, because the company has shown no hint of a plan for many years now -- I would be seething with outrage.

On the other hand, I don't mind that Sam Palmisano is leaving IBM with a severance package worth something like $170 million. Sam -- no, I'm not his crony, everyone at IBM called him by his first name -- spent nine years as IBM's CEO. During that time, the value of the company roughly doubled, creating $90 billion or so in shareholder value. Sam helped create roughly $600 of value for each dollar/year in his severance.

In contrast, Apotheker, when he ended his 11 months at HP, was given a dollar for every thousand dollars that HP lost in valuation on his watch. He got $33 million for being fired. If I were an HP shareholder -- which I'm not, because I've been paying attention -- I'd want to sue the Board of Directors for malfeasance.

The genius of capitalism is the motivation that great rewards might be earned by great efforts. Capitalism itself is undermined when long-term cronies guarantee prosperity no matter how much an executive screws up.

I have a simple proposal. Set a statutory maximum for guaranteed severance packages -- a million dollars strikes me as plenty for any failed loser of a CEO. Bigger bucks could still be part of a severance package, but they should be calculated as incentive payments, like bonuses. The big parting rewards should be tied to some measure of performance -- profits, stock price, employee satisfaction, even cleanliness of restrooms would be an improvement -- to give these high-powered one percenters a bit more motivation to actually do their jobs.

1 comment:

  1. "even cleanliness of restrooms would be an improvement"

    Well here's an idea...

    Why don't we get the CEO's to clean the restrooms - every day until the company is performing well and ALL employees get a share of the profits.