Saturday, September 26, 2009

How to End Decoupled Executive Pay-for-Performance & Extravagent Perks

Over the past 2 weeks, I’ve criticized Yahoo!’s Carol Bartz and HP’s Mark Hurd for excessive pay and perks, given their companies’ recent performance. It’s been interesting to read the many emails I’ve received on the articles – mostly from employees of both companies.

A few emails – maybe 5% -- take the CEO’s side and make the case that paying our leaders a lot of money is part of our capitalist system. Their advice to me: get over it already.

However, the majority think it’s crazy that these leaders (more so Hurd because Bartz has only been there since February) have pushed through job cuts and slashed pay for workers and then pay themselves and their lieutenants gobs of money.

One reader who asked “why do people equate corporatism to capitalism?... Corporatism (what people ignorantly call capitalism today) transfers ownership of assets from the individual to the corporation. In pure capitalism, ownership of assets is predominantly held, and kept by, the individual.

One reader asked me, expressing shock and outrage at how HP’s execs could be flying around on private jets for personal trips on the shareholders’ dime when she knew several former employees now in food lines, “how can this happen that these executives get away with this?” There are many to blame here.

Not many journalists or retail shareholders go through a company’s proxy statement in detail, reading footnotes on each page outlining executive comp. When mainstream reporters cover an executive’s new pay package (like Bartz’ back in January), they typically vastly understate it. Why? Quite simply, it takes a long time to read through and digest all the variables to tabulate a true likely scenario of what someone’s going to be paid over the next year or few years. Most journalists want to pump out a story and move on to the next one – or frankly aren’t trained in how to read all the permutations of a comp table.

If journalists aren’t able to read through these comp tables, is it any wonder that most retail shareholders can’t or don’t?

And, although the SEC has tweaked the requirements for how companies need to report this information, you can’t say the agency has nailed it yet, if the goal was for shareholders to be able to understand the information and act on it when necessary.

There is one group smart enough to know what’s going on in the comp tables, and is in a position to call out CEOs for egregious pay: the analysts who cover the companies. Yet, they won’t, because it doesn’t do them or their employers any good. Even post-Henry Blodget, analysts don’t get bonused for antagonizing CEOs with comfy pay packages. So, they keep their heads down, pump out meaningless price targets, and ask innocuous questions of management during their quarterly calls like “I wanted to get a little more color on your day sales outstanding,,,” or “what assumptions should we make about your tax rate for next year” and – my personal favorite – the obsequious pat-on-the-back “great job, guys.”

The few activist investors left are only going to poke the few companies that they take positions in. They’re not going to call out large numbers of CEOs – especially if they don’t have skin-in-the-game.

Larger institutional shareholders like Barclays Global or Legg Mason or some of the larger pension funds could take this issue on – and sometimes will raise their voice. However, these investors typically have hundreds of holdings. Is it worth their time and effort to stop and publicly criticize Mark Hurd or Carol Bartz? They also tend to shy away from having their comments in the press. So they’ll discuss their views during private chats instead – unfortunately keeping the CEOs self-serving practices from the light of public scrutiny.

Who’s left? Employees, who definitely have a vested interest in seeing a company’s shares increase and calling out internal practices that are hurting a company’s long-term prospects. But these people will not speak up publicly – understandably so – for fear of their jobs.

Then there are labor groups like the AFL-CIO and AFSCME – or Michael Moore for that matter -- who bring up excessive executive pay. Entrenched and overpaid CEOs and their aiders and abeters have been successful in portraying these groups as extremist and thus marginalizing them.

So, how will this problem of enormous executive pay that’s delinked to performance change? After all, we’ve been talking about this problem since at least the early 1980s and it’s never, ever changed. In fact, it’s only become more delinked.

As someone who strongly supports a free market capitalist system – not crony capitalism or ‘corporatism’ as the reader called it – I think it’s the responsibility of shareholders to speak up and put a stop to this. The SEC can help by changing regulations to make it easier -- and closer to a free market ideal -- for shareholders to remove entrenched directors who are not representing their interests in overseeing CEOs and management (such as the proxy access initiative being considered at the moment, which is an improvement over the status quo, but certainly could go further). Yet, it must start at the individual level, with each shareholder -- large or small – speaking up and making their voices heard.

Shareholders who assume they can free-ride off of what Gordy Crawford of Capital Research does (or Carl Icahn or Eric Jackson or whomever) will be playing right into the hands of Hurd, Bartz, and other CEOs who want us all to look away from all the pay and perks they’re getting – whether or not they perform.

I don’t expect employees to be martyrs and sacrifice the financial futures of their families by speaking out. But, with the Web, it’s become easier than ever for people to anonymously – yet with credibility and impact – share their views on a particular topic.

Shareholders also need to learn that, when you gripe about some fat-cat CEO on a Yahoo! Finance message board or a disgruntled employee blog, nothing changes. You have spoken as 1 voice only, and it’s been lost as soon as the words have left your lips. However, when you pool your voices together and speak as a group, it becomes impossible to ignore.

I hope that HP and Yahoo! shareholders (whether employees, retail shareholder or large shareholders), as well as other shareholders being extorted by crony capitalist boards and CEOs, start to channel their voices and put sufficient pressure on them to change their ways. Decoupled pay-for-performance (and extravagant perks) won’t change until shareholders rise up and say “we’re mad as hell about this and not going to take it anymore.”

[Jackson’s fund owns no shares in the companies mentioned in this article at the time of publication.]

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