In late February, I spent an afternoon interviewing Selected Funds' Chris Davis and the interview touched upon a variety of subjects, which you can read about in the April issue of Financial Advisor. Executive pay was not the front-page issue it is at this moment, but the subject did come up as we discussed the rise of what he called a "pseudo-populist, anti-business environment."
Davis thought the idea of the government having a say in exec compensation was horrible. At the same time, he said the government should "mandate" that shareholders have a direct voice in what top executives of public companies make. We didn't get into the details of how this would work, but I have to agree with his basic principles.
The vast majority of American investors-both retail and institutional-are happy to reward successful CEOs, particularly those who achieve great wealth through the same vehicle as shareholders, namely the stock. And everyone agrees that something is wrong when CEOs like Robert Nardelli, who left Home Depot in sad shape and got a $200 million package, or Stan O'Neal, who left Merrill Lynch struggling for its life and was given $150 million, get the same valedictory treatment.
Results and performance exhibit little correlation in the level of exec comp. Lee Raymond did a great job at Exxon-Mobil and got $360 million when he left victoriously. But Hank McKinnell took Pfizer from being a hugely respected global company to being a deeply troubled, bloated business facing the threat of huge patent expirations on products McKinnell had vastly overpaid for. He got more than $400 million.
In fairness, all these companies were simply executing contracts that were only a little excessive compared with other CEO deals.
Incidentally, McKinnell and members of the Pfizer board BOTH were supposedly shocked when he got fired at a board meeting the Friday before Labor Day. Reports indicated that the meeting was intended to outline potential succession, not to determine it. So sparks must have flown that day when the Pfizer board decided to replace McKinnell with top in-house attorney Jeff Kindler, a former general counsel for Mickey D's with very limited experience in pharma.
If things go back to normal, and businesses, shareholders and the public start seeing better economic times, the issue may fall off the radars of the nightly news. Unfortunately, that's at least a year or two away.
Right now, executive pay has been allowed to reach a point where it is unleashing mob anger. Protesters are organizing bus tours to protest outside of AIG execs' houses. In Scotland, a group threw a brick into the house of RBS's ousted CEO and French workers kidnapped a 3M exec to negotiate better severance deals. As ugly and, in the last two cases, illegal as these acts are, it's impossible to justify the deals some execs have received.
In the end, I vastly prefer the treatment Pfizer shareholders gave McKinnell when news of his $400 million pension slush fund was disclosed to the public. Hearing that many protesting shareholders might show up at the company's annual meeting in the New York metropolitan area, the drug giant moved its annual meeting to Omaha. When shareholders arrived at the Omaha hotel, low-flying planes were circling the venue carrying trailing signs saying, "Give It Back, Hank." He ran, but he couldn't hide.
The only way I see to resolve this is by making virtually all exec pay beyond the basic salary payable only in long-term restricted stock. All the options and share appreciation plans create perverse incentives to manipulate next quarters' earnings.