Forget baseball if you really want to make a killing
By Michael Kinsman
When Alex Rodriguez signed a $25 million a year contract to play baseball several years ago, I shook my head that an owner of a baseball team was silly enough to pay him that.
He might be a great baseball player but $25 million a year seemed a bit farfetched for anyone to be paid. Yet, this was baseball and A-Rod was simply selling himself to the highest bidder.
If you believe in free enterprise, you have to admire that A-Rod created a market for himself that would make him so rich.
But if you believe in free enterprise, you also have to be sobered by the fact that 40 chief executives each made more than $25 million in 2005 and one, Richard Fairbank of Capital One Financial, was paid $249.4 million for one year of work.
Now, Bob Nardelli, the chief executive of Home Depot, expects to be paid $210 million in severance for leaving the company.
It's moments like this that I am really glad I don't own a lot of stock. Who at Home Depot ever agreed to a contract that would pay someone a fortune just to leave the company? Nardelli isn't the first CEO to leave with the building in an armored car carrying cash, and he certainly won't be the last.
John Challenger, the CEO of the Chicago outplacement firm Challenger, Gray & Christmas, believes that the Sarbanes-Oxley financial oversight is having an effect on the executive suite. He notes that there were 12 percent more CE0 positions that turned over in 2006 than 2005.
Eventually, he believes, that Sarbanes-Oxley will require CEOs to prove their worth day in and day out, leading to shorter CEO tenure and lower compensation.
But this really sidesteps the issue of why CEOs make so much. The salary-setting mechanism for chief executives is rather extraordinary.
Typically, the CEO's salary is set by a limited number of members of the company's board of directors known as the compensation committee.
If you know anything about corporate boards, you know that board members are often friends and, sometimes, confidants of the chief executive. They get picked for the board, often at the direct request of the CEO.
So we are left with a compensation committee that is chosen by the friends of the CEO and often includes a close associate or two of the CEO, too.
Hmm. I wish I could pick the people who decide how much I will be paid. Trust me, my salary would be a lot higher than it is today.
Of course, the directors of any public company must stand for election.
That means that shareholders have the right to vote for anyone these choose to serve on a company board.
But we have you ever really explored the concept of "shareholder democracy"?
There really is nothing of the kind. Shareholders vote annually on who will serve on the company's board of directors. But they are given a slate of directors chosen by the CEO and existing directors on who should serve on the board.
This really is no choice.
How often have you seen shareholders select their own candidate for a corporate board and actually get that member elected to the board? It happens, but it is rare.
In 2003, the average CEO of a large corporation earned 300 times the amount of the average worker in those companies, up from 140 times in 1991.
The secret of controlling extravagant pay rests with reforming the way boards of directors operate. The friends of the CEO should not be the ones setting salary and compensation and shareholders need to have more power to actually get independent minds on the board.
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