Unjust Rewards
CEOs keep pocketing fat raises, but it may be about time to pay the piper
And, increasingly, even boards that aren't facing an immediate investor revolt are taking steps to link executive pay more closely to performance. A survey of America's 250 biggest companies by consulting firm Frederic W. Cook found that the percentage giving out traditional "plain vanilla" stock options has dropped from 99 to 90 percent since 2003. Such options are the right to buy shares of stock at a preset price (or at the market price of a predetermined day). They have been criticized for enriching executives who simply held on long enough to allow inflation or a general market rise to push their stock price up. Some board members are also realizing there may be drawbacks to awarding restricted shares, which executives earn over time and can't sell for several years. Executives with restricted shares suffer along with shareholders when stock prices decline. But some argue such shares don't really link the executive's pay to his or her performance, since they are doled out as a gift. Thus, executives can still profit even if the stock price declines. More and more companies, as a result, give out options or shares that vest only if an executive meets preset profit or stock goals. Fully 17 percent of the top 250 companies added performance hurdles to equity grants since last year, Cook found.
A few CEOs have even started to push away from what their boards offer. Susan Lyne, CEO of Martha Stewart Living, put $200,000 of her $625,000 cash bonus for 2005 into a reward pool for employees. Edward "Ned" Kelly, CEO of Baltimore-based Mercantile Bankshares, early this year cut himself loose from a golden parachute that promised him $9 million if he was forced out. He didn't want his employees to think he might be motivated to sell the firm to collect the big severance payment. But he also wanted to set an example. He wasn't the first CEO to hand back a parachute, but he hopes his decision might help accelerate the trend. And he wants the public to see that "all CEOs are not irresponsible and bad."
More on executive pay: Page EE10
advertisement
