Some years ago, Congress passed a law called the Foreign Corrupt Practices Act. It was designed to prevent companies from making payments to foreigners to get business abroad. Its proponents said this was corrupt, while others said it hurt U.S. workers to prevent companies from playing by standard foreign rules when abroad.
How is it, then, that it is "corrupt" for foreign companies to pay others to get business, but apparently OK - even allegedly virtuous - for company executives to pay themselves millions of dollars, sometimes hundreds of millions of dollars (dwarfing many payments to foreigners) for no apparent reason other than the laughable one that they claim they won't otherwise work?
What sort of payments are we talking about here? According to published reports:
Time Warner Inc.'s chairman was given 1 million stock options (not dollars), along with his other compensation. A letter explained that while this might seem like a "very large grant"(indeed) "it is the only option grant he has received since 1990." Poor dear.
Coca-Cola Co.'s chairman received a salary and bonus last year that when combined with previously granted restricted shares and options he still holds totaled $300 million.
IBM Corp.'s now-former chairman - who led the company during (into?) its first operating loss, taking more than $15 billion in charges and losing $28 billion in shareholder value (surely one of the worst corporate performances in history) - was just given a retirement package that included a $3 million severance check, an annual pension of $1.2 million, around $1 million in options and a bonus (a bonus?!) of about $100,000.
A Westinghouse executive (not the CEO) earned more than $10 million for 18 months work. Some have suggested the work wasn't done particularly well either.
Over the past 12 years the various pieces of the compensation package of General Electric Co.'s chairman have totaled nearly $10 million a year in value for corporate performance one consultant judged to be the "middle of the pack."
One reads so many of these stories - and these are only some examples - one becomes desensitized. It starts to seem normal for a person who is supposed to be looking after shareholders and employees to pocket $10 million that could otherwise go to them - or even to foreigners to get contracts.
Two bits of standard wisdom about executive compensation that seem a long way from wise further desensitize shareholders.
The first observation, complacently repeated at conferences by CEOs and institutional shareholders alike, is that it is OK to pay CEOs amounts that truly make them not just well-to-do, but make them some of the wealthiest people, as long as the pay is linked to performance. What utter silliness.
Everyone agrees that at some level pay becomes too high: it would be too much to pay an executive all corporate profits, leaving none for the shareholders. But the standard wisdom is that for big companies at least the cash flows are so large that a little larceny at the top will have next-to-no effect on the bottom line. Anyway, large amounts "incentivate" CEO productivity. The problem is huge amounts of pay might not have these good effects. They may, instead, have significant bad ones (besides the awful one of causing otherwise educated people to use words like "incentivate").
Probably the single biggest problem with paying executives lavish amounts is that the payments have a tremendous negative impact on corporate productivity. They do so because they have a tremendous negative impact on other employees' morale, on their interest in conserving and enhancing corporate assets and on their long-term loyalty to the company: Why should employees work hard to save the company a few dollars when it just gets skimmed off by the CEO? There is no way any theoretical additional motivation created in the CEO by megamillions can offset this huge corporatewide negative effect. Yet who measures these huge costs generated by astronomical executive compensation packages? By and large directors don't even talk to employees below very senior management.
In addition, those who say the amount doesn't matter also seem to be naive about the impact of outlandish pay on executives themselves. Extravagant pay can act as an arrogance booster shot. It is really hard for someone making $10 million a year to think he has missed something. It is also hard to feel tied to the long-term success of a company when one, well, isn't - because one is independently wealthy.
Further, when one is showered with money, one is almost forced to spend time enjoying and overseeing one's extensive personal estate at the expense of time spent managing the company. Yet no one seemed to ask how Westinghouse's ex-chairman found time to oversee his small winery in Italy when the company was hemorrhaging.
Astronomical pay, then, can have negative effects.
The second executive compensation platitude that needs retooling is the related notion that one cannot motivate without printing money pursuant to a fancy formula. High pay is not the same as pay for performance and may not, in fact, improve performance. Compensation can be tied to performance without giving away the store.
One of the biggest ironies of the performance pay debate is that it is focused on CEOs who probably have such set work habits that it is extraordinarily unlikely that paying them $10 million instead of $1 million would make them work any harder anyway. In fact, in interviews they swear they don't work for the money. It is also ironic that while data suggest it is the threat of losing money, not just failing to hit the jackpot, that actually affects people's motivation and work habits, virtually no CEO package has a real downside - although a few brag about the fact that if the company does poorly they may not enjoy an upside. Imagine my relief.
But where do formulas come in? A salary, with or without a bonus, can be tied to performance in the old-fashioned way: the people who review an employee's performance can adjust it annually. So why again do we need a mechanism that systematically converts corporate assets to personal ones, like some financial desalination plant, especially given the negative affect on other employees and productivity?
Many CEOs are good managers; some are terrific. But most CEOs aren't Thomas Edisons or Marie Curies who might need special coddling to nurture their unusual talents, and who are otherwise irreplaceable.
Perhaps we could apply the Foreign Corrupt Practices Act to domestic payments of eight figures or more. Or shareholders could tell boards that a formula generating money is not the best answer to all compensation questions.
Sarah A.B. Teslik is executive director of the Council of Institutional Investors, Washington. Her commentary was adapted from an article in the group's newsletter.