Unjust Rewards
CEOs keep pocketing fat raises, but it may be about time to pay the piper
Headlines from the CEO compensation wars: The Securities and Exchange Commission is looking into charges that William McGuire, the chief executive officer of UnitedHealth Group, backdated stock option grants to amass a fortune of $1.6 billion. Pfizer CEO Hank McKinnell collected a $16 million pay package last year and has racked up a $6.5 million annual pension, even though his company's stock has fallen about 9 percent a year during his five-year tenure at the helm. On top of his $15 million paycheck for 2005, General Electric CEO Jeffrey Immelt is pocketing $1 million more a year in dividends from shares he doesn't currently own and will receive only if he improves the company's lagging earnings.
So it goes in the world of executive pay. In a sampling of companies with revenues of at least $1 billion, compensation consultant Pearl Meyer & Partners found that the median CEO got a 10.3 percent raise last year and took home at least $8.4 million (not counting hidden perks like pensions or dividends on shares not owned). Meanwhile, these firms' stockholders saw median returns of just 5.7 percent last year. And rank-and-file raises averaged just 3.1 percent, lagging behind inflation.
There are, however, subtle but important signs of change. This year, for the first time, some regulators, investors, and even a few red-faced CEOs may have finally concluded that executive pay has gotten out of hand. They have taken a few small steps that could improve the chances that executives who get big paychecks actually earn them. "People don't object to paying somebody really well if he's doing a good job," says Richard Kinder, who takes only $1 a year as CEO of Kinder Morgan because he owns 18 percent of the Houston-based gas pipeline company. "But when a CEO runs a company into the ditch, and ordinary employees find out their pension plan is not fully funded, and, lo and behold, the CEO gets a million dollars a year for the rest of his life, that is a problem for your employees and the investing public."
The single most important pending reform to executive pay is almost guaranteed to make workers and investors more aware of those kinds of problems next year. Until now, companies have had to reveal, separately, only the dollar values of salaries, bonuses, stock options, equity grants, and certain expensive perks. But many CEOs and directors exploited loopholes that allowed them to build up huge and hidden goodies like pensions, promises to cover certain tax bills, or dividend payouts on stock they didn't own.
No more. The SEC is expected to pass a rule this summer that will require companies to publish a tally sheet (quickly nicknamed a "holy cow sheet" because of the revelations expected) including allcompensation and reporting a one-number total for each director and top executive. Brace yourself, warns Jan Koors, a managing director at Pearl Meyer: "The numbers next year are going to be a heck of a lot bigger."
The "Lake Wobegon effect." An honest accounting of executive pay "will put pressure on the whole system to get it right," SEC Chairman Christopher Cox told Congress this month. But Koors fears that correction might not happen right away. She predicts that initially, at least, CEOs and boards will use the new numbers to demand even bigger raises. She estimates that perhaps 60 percent of her corporate clients want to give their executives pay packages that rank in the top 25 percent of their competitors'. This "Lake Wobegon effect" (named after author Garrison Keillor's mythical town where all the children are above average) has been blamed for much of the recent run-up in pay, since it forces companies to leapfrog one another's pay packages to stay in the top 25 percent. The new tally sheets may only accelerate that, Koors believes. "This will drive up pay because the board will say: 'Look, we don't have nearly as rich a retirement plan'" as competitors and will give big raises to catch up with their benchmarks.
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