FREE KIC - NO. 13 OCTOBER
THE MAD MAD WORLD OF EXECUTIVE COMPENSATION
I have a good friend who works for HP at their campus in
Leixlip. Whenever we meet up we generally have a chat about how things
are progressing at the company. I hadn’t seen him for a few weeks
so I was dying to hear all the gossip, given all the revelations that
have emerged in the last few weeks about members of the board hiring
private investigators to find out who was leaking information to the
Many years ago I read about the famous “HP way”, the
culture of trust and integrity that had been central to the original
founders beliefs. I had therefore been surprised to see just how much
the culture had changed. When I met my friend the first thing I said
was that Bill Hewlett and Dave Packard must be turning in their graves
seeing what has happened at the company they founded. My friend then
said that it all began to change when Carly Fiorini became the new CEO.
$42m for doing a bad job!
My friend said that she quickly moved away from the paternalistic
approach that had worked so well. He then went on to express his horror
at the amount of money she was given when she was eventually fired. He
said that he thought it was about $50m. (I have since checked and it
appears that it was about $42m if pension is included). Now to my
friend that type of money is absolutely mad and so it made me think
about how we have ended up in a world where somebody can get $42m for
doing a bad job while a hard working dedicated employee will make just
enough to keep a roof over his head, food on the table and a car on the
road. I would classify my friend as that hard working dedicated
employee who has spent the last few years trying to make sure that the
SAP software applications in HP work. For all his hard work and
dedication he will receive a modest wage and he has to watch with
amazement at the monopoly money that is given to the executives.
I know that American companies pay their executives the most but
I was fascinated to come across a Forbes article outlining who got the
biggest package in 2005. According to Forbes the CEO of Yahoo, Terry
Semel, received a total package of $230m. Yes you are reading that
properly, his total package including stock based payments was over
$200m. If your package was less than $38m you didn’t make it into
the top 25.
In third place on $124m was William Maguire of United Health
Group. This is the same William Maguire who resigned a few weeks ago
because he backdated option grants in order to maximise their value. I
guess he really needed an extra few million!
There has been a lot written about this phenomenon and I get the
impression that the majority of people do not believe that this scale
of compensation package is appropriate. I think that it is crazy to
suggest that this is necessary to attract talent. I can guarantee you
that talent will be attracted by far smaller compensation packages.
American companies giving these packages allow executives
in other parts of the world to say that they are relatively under paid.
I think I have read on a few occasions various people saying that
European companies need to pay their executives more because good
executives could be lured to America. In other words if we are to
change this crazy situation we really need to start in America.
I believe that people need to put more pressure on the
owners of American companies to change the current situation. You might
ask me how can this be done. I believe that the big American
institutional investors (Fidelity, Vanguard, Calpers etc) need to start
voting against these pay packages. If an investment company does not do
this well then the ordinary investor who gives his/her money should
withdraw that money and give it to a firm that will take the lead.
A good example of this occurred in the UK in 2003 when the
proposed £23m pay package of JP Garnier in Glaxo was voted down.
The only fund manager to openly declare that they were going to vote
against was Morley. This was the type of leadership that should be
rewarded by investors giving them more money to manage.
Here in Ireland we almost had an example of this earlier this
year when over 40% of shareholders voted against the decision to give a
€579000 compensation package to Gary Kennedy who lost out to
Eugene Sheehy in the race to become CEO.
I look forward to the day when there will be a majority voting against the packages of leading executives.
Looking at this whole argument from a different
perspective I just want to explain why I think executive pay should be
a lot less. I have met a large number of leading executives from
companies all over the world and at the end of the day I struggle to
believe that many of them have done anything fundamentally creative or
innovative. Even if they have done a good job I believe that current
compensation packages are still far too generous. I believe that the
gap between the ordinary worker and leading executives should be less.
John Chambers CEO of Cisco is doing a great job but a 2005
package of $40m is far too high. I am not sure exactly what it should
be but I believe that it should be a lot less. If John Chambers was
paid say $5m he could still make himself a lot wealthier by investing
in Cisco shares if he honestly believed that his genius was going to
create enormous added value.
Was this man worth $40m in 2005?
When Cisco was trading at $18 I recommended it as a good
investment because I believe that John Chambers has done a good job. He
may be doing a good job but if I had the chance I would still vote
against his compensation package. (If you want to vote you have an
added problem that if you own your shares through a nominee account you
will probably never get the chance to use your vote. Surely technology
will soon allow this to change. I want to be able to vote and I want
fund managers acting on my behalf to vote). I hate to think what a sub
contract worker assembling Cisco equipment in China earns but I think
that I can hazard a guess that it is quite low. I believe that morally
I cannot justify this gap.
Returning finally to my friend in HP. I know he feels that he
cannot do anything about the $42m compensation that was given to Carly
but at least it should be brought to the attention of as many people as
possible and that if enough fuss is made about it eventually things
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