CEOs can resolve the row over CEO pay.
The popular business press and newspapers have already had a circus with Time Warner's Steven Ross. Although the $56 million be got--for a performance record below that of fellow publishing and broadcasting CEOs such as Tribune's Stanton Cook who got $1.4 million or Washington Post's Katherine Graham who took home $912,000--appears a bit absurd, his is not the most egregious case of imperial reach. (See "Pay Is The Message," CE's annual survey of CEO compensation, September 1991.)
"If there's a rationale for all this other than greed I don't know what else could explain it," say Reid.
Most of CE's roundtable participants agree, but hasten to add that the extreme cases of avarice blind people to the reality that most CEO's pay is aligned with performance (70 percent, according to PCA's Dave Meredith) in the sense that high performers get high pay and low performers get low pay relative to their industry. The typical chief of a billion dollar firm gets $800,000, which ain't much compared to Mike Tyson's $30 million, or Madonna's $25 million (although it's better than General Norman Schwarzkopf's $103,000).
Described by some as an investor with an attitude, Dale M. Hanson, CEO of California Public Employees Retirement System, whose $65 billion portfolio is invested in some of the nation's biggest corporations, says he doesn't want to tell boards or CEOs how much to pay, but he sees plenty of danger signals that cause him to become more activist in holding management accountable. For example, CalPERS criticized ITT for paying its CEO Rand Araskog $30 million over a four year period during which the company's stock fell 10 percent. It unsettled Sears Roebuck when it supported dissident shareholder Robert Monks's unsuccessful bid for a seat on Sears' board. It also unsettled Lockheed's Dan Tellop when it threw its support behind Harold Simmons' unsuccessful effort to gain control.
Not all of Hanson's activities are confrontational. He amicably persuaded GM's Bob Stempel to commit to maintaining a majority of outside directors on GM's board, even getting Stempel to have CalPERS lawyers help write the bylaws to make it possible. He also convinced companies such as Great Northern Nekoosa and USX to junk their poison pills in favor of so-called "chewable" pills that give management more time in the face of a takeover but that avoid share dilution.
Retired Citicorp CEO Walter Wriston, who holds directorships at GE, Chubb, Bechtel Investments, Sequoia Ventures, Pan Am, Tandem Computers, United Meridian, and ICOS Corp., blames the "ratcheting effect" of increasing pay levels on the misplaced notion by CEOs and directors of wanting to be in the first quartile. He disagrees with Stern Stewart's Joel Stern that CEO pay (as well as Wall Street's quarterly earnings pressure) forces leaders toward short-term thinking. "CEOs simply don't think the way most analysts think they do," he says.
Stern for his part argues that the quest for value is hopelessly confounded by obsolete financial management systems where the wrong goals and performance standands are measured. This results not only in many CEOs beig overpaid, but a significant number being overpaid, too. Willis Corroon's Dick Miller believes that, while not perfect, most CEOs are adequately compensated. However, he prefers to see the bulk of a CEO's personal net worth tied to the fortunes of his company. Universal Health's Alan Miller likes to see management own its own firm's stock and is uncomfortable when it doesn't. Views differ over how best to get stock into management hands. Stock options strike some as simply a giveaway where if the company does well, so does the boss, but if it doesn't, he doesn't lose anything either.
Nell Minow, who succeeded the aforementioned Robert Monks as president of Institutional Shareholder Services, believes that much of the problem with compensation arrangements arises out of the tenuous accountability between chiefs and the shareholders whose interests they are supposed to represent. There's a proven link between overpaid directors and overpaid CEOs, she argues. "I do not believe anyone who says that it makes no difference who hires and fires the compensation consultant or how many directors are independent." On this point CEOs and compensation experts disagree strongly. Roundtable participants suggest that directors too should be compensated in stock as much as possible to tie their fortunes to that of shareholders. Through greater monitoring of proxy resolutions, institutions will exert greater influence on management policies. Minow is developing a U.S. version of the U.K.'s ProNED, a clearing house/recruiting firm established by British institutional investors, to generate independent director candidates for boards of public companies. A lively and at times sharp discussion hoted at New York's Mark Hotel about measuring performance at the top follows.
David Meredith (Personnel Corporation of America): What makes compensation such an interesting phenomenon is the notion that compensation committees have really focused on the wrong question. They have focused on the question of how much do we pay, as well as what's a competitive rate of pay.
In my 25 years experience, the first and oftentimes the last question that's asked by the compensation committee is wha't the individual worth? What is the rate for the chief executive?
There's no question that there's a "ratcheting" activity. In our research, we asked a sample of 225 CEOs where they wanted to position their company vis-a-vis competitive practices, and I think 93 or 94 percent of them said they wanted to be paying in the top half.
Walter Wriston (formerly of Citicorp): That makes it hard.
Meredith: Right, that makes it very hard. And when you actually asked them what they were paying, well, they were already paying in the top half.
But the focus historically is, how much should we pay? Nowhere near as much attention has been focused on the issue of what kind of chief executive behavior or what kind of action are we trying to reinforce with the pay systm. In other words, how should we structure it?
That is the nexus of the issue, and one that has led us into a situation where we really aren't paying for performance. If you look through the research that we have done on it, you see that there is an increasing correlation, but not a very strong one, between the levels of pay and amount of pay that a chief executive gets and the kind of performance the company has turned in, performance measured against all industry or performance measured against the industry segments that they're in.
Joel M. Stern (Stern, Stewart & Company): Have you refined your method of measurement of performance? Do you have a reasonably accurate measure?
Meredith: We've taken a fairly simple notion, which is to say that we'll compare the performance in terms of total return to shareholders over the last four-year period and take it by industry. So if General Mills has outperformed Quaker, General Mills has outperformed Quaker from a shareholder perspective. That's the way I as an investor would look at it in terms of how I am doing. Are we doing better than those in the industry segment that we're investing in or are we not?
In looking at the historic approach that companies have taken to compensation, it was clearly an approach that provided a payoff to the chief executive for growing the business. The bigger the business, the bigger the competitive rate of pay for the position. That may or may not have been appropriate in the 60s and 70s when they were trying to grow and make this a larger enterprise, but that was what was being rewarded. We've seen over the years, and it's a truism that has held in survey data forever, that for every doubling in size of the corporation, there's a 25 to 30 percent increase in competitive rates of pay for the chief executive. In other words, if you can get your corporation to be twice as big as what is is, you've got competitively about a 25 to 30 percent increase in pay. So the strongest indicator of pay has always been the size of the company. Performance is usually a secondary indicator.
Alan B. Miller (Universal Health Services): But there's another facto in that it's more complicated to manage an operation that is growing or that is twice the size of another operation. The other thing is that if a company doesn't grow, regardless of the chief executive's pay, the people inside are not going to be very happy unless they have a place to grow. So the chief executive might be getting too much blame for trying to increase his salary by mindlessly blowing up the company to a tremendous size.
Meredith: If size happens to be the right measure, so be it, But in our view, there are clearly other things like strategy development, product development, people development, facilities development, and the like that are all drivers of what is the value that will ultimately be created for the shareholder.
The disservice we have done from a compensation consultant's perspective is focusing on size as the beginning point. Every single presentation to a compensation committee that I've ever seen will start out with, "We looked at your industry segment and we did a regression analysis of sales versus CEO pay. Here is the 50th, here is the 75th percentile, and we'll go fromthere." The discussion virtually ends at that point instead of once you've figured ballpark, what do you want to do from a pay perspective? The real issue and the challenge of the late 80s now into the 90s is, how can we use pay to reinforce the kind of behavior that we want to encourage within the corporation?
Let's say that if the size of the company increases, we'll increase your base salary. If we increase your base salary, we'll increase your target bonus. Increase your target bonus, we'll increase the number of restricted shares you have. That's the ratchet. As opposed to saying let's put a number on the value of a chief executive performing at a given level and then start to focus on what the mix of the pay equation ought to be. I don't think the level makes a hell of a lot of difference. In fact, we know it doesn't. From an overall economics perspective, high-paid company CEOs don't perform any better than low-paid ones. So how should that pay be delivered? Let's say the CEO is getting 100 rubles. If you deliver 100 rubles in salary, the only incentive you have there is for the chief executive to keep his job. There is no up side for me, and there really is no down side risk other than losing my job.
Or you could transform it by putting a significant portion of the equation--some or all of your bonus, or trade in a portion of your salary--in the form of stock.
Stern: When you talk about stock, are you talking about stock options or are you talking about restricted stock? Are they interchangeable to you?
Meredith: No, not at all. Restricted stock grants underlying value. Stock options have value only if there is appreciation.
Stern: Well, the studies that have been done on restricted shares indicate that when a company announces that it's paying its CEO restricted shares, then the stock price falls, and dramatically so. The reason for it is it seems to be an unambiguous signal that the prospects of the firm are not very great.
Meredith: How about if it's done all in cash? If instead of granting compensation in part salary and part restricted stock, you grant it all in salary. That's an even more dismal signal. If you look at John Reed of Citicorp in 1990, it was all salary. He had had salary and options and so forth in the past. For 1990, the whole enchilada was in salary, as opposed to a Chemical or a Chase, where they had substantial grants of both stock options and restricted stock for their CEOs.
Wriston: Except that John owns part of the company.
Meredith: Yeah, not in his pay package, but he bought it on his own.
Wriston: Which is another interesting factor that never gets in the equation.
Meredith: Well, it should get in the equation. The ownership piece of it is a critically important one. It's how do I encourage more risk, more commitment. The LBOs and the venture capitalists dictate that you do that--put your money up or we don't want to invest. Public corporations tend not do that.
OUT OF THE MONEY
Wriston: How many companies have a premium option?
Meredith: Very few.
Wriston: I'd say they've got to be as rare as the dodo bird.
Stern: The concept of having an out-of-the-money option should be very attractive to institutional investors because you're betting on the future. The trouble with stock options is it's a literal giveaway program. And it's diluted. If you have an out-of-the-money option program that somehow reflects on the cost of equity capital, then it's a nondilutive option, and it really does not hurt the shareholders to have those types of options either granted or purchased by the manager.
Meredith: Hold on, there are other considerations here. The FASB regulations won't permit rising strike prices and treating the stock option as a capital transaction rather than as a compensation expense.
Stern: That becomes a tax deductible item.
Meredith: It's tax deductible under either circumstance. In fact, the one with the rising price option hits both the P&L and the balance sheet. With stock options, it's only a balance sheet transaction.
Stern: As long as you're getting the tax saving, what difference does it make whether it's reducing earnings or if it's going directly as a charge to the capital account?
Meredith: The difference that it makes is that the reported earnings are lower, and we know where reported earnings are lower you're going to drive some out of the market.
Dale M. Hanson (California Public Employees Retirement System): I just don't agree with that. That almost fosters a short-term phenomenon. You can look at General Dynamics if you want to talk about incentive compensation where you basically watch the stock go down to the twos and erode by 50 percent, and now suddenly we put in this new magic 10-day formula and, lo and behold, now the stock is starting to come back up. But it's still not back to the level it was before, and now you have a CEO who's walked away with almost three times what his annual salary was. Are you telling me that that's sending the right signal? Particularly when people perceive institutions as living quarter to quarter? We are now embracing through CEO compensation something that is almost like day to day.
Meredith: The issue is, what signal are you reading? Are you reading the signal that says I'm betting on the stock price coming back? Or do you want to leave a signal that says I don't care what the stock price is? I would think that as an institutional investor you would be concerned about what's going to happen to the stock price, and you'd want the CEO to be concerned about it as well.
Hanson: I look at one thing, and that's total return. That's really the best key to the whole process. Everybody wants to beat the drum on international competition, but let's be honest. There's only one area right now where we stand out in international competition, and that's compensation. We're clearly the leaders in the world. [Laughter.]
CalPERS is an organization that is rightfully categorized as an activist. We're not embarrassed by that term; we're rather proud of our role in the issue of corporate governance and shareholder rights. We have a good track record.
There was a lot of media attention last year on our voting against the directors of ITT and Rand Araskog's salary. We put out a press release recently on a new agreement that we have reached with ITT, and because it was part of the kinder and gentler era and it was not confrontational, I have yet to see any national media pick the document up and run with the story. We have continued discussions with ITT, very positive discussions. Rand Araskog came to Sacramento and met with us. We talked about executive compensation. I give Rand Araskog a tremendous amount of credit for that. We've had several subsequent meetings in New York and have forged a new agreement as part of our 1992 discussions.
However, I do not think shareholders should be involved in setting CEO's salaries. That is clearly and rightfully the duty of the board. Hopefully, we can all agree that one of the critical functions of the board is to hire the CEO, to evaluate the management, and where appropriate, to hire management. The shareholders will increasingly be focusing on the board and asking if those directors are truly representing the shareholders. The board of directors is really the entity that we should be pouring our energies into.
The compensation committee should be hiring the compensation consultant, not management. It is surprising the number of directors that will come up to me and say I am absolutely upset with the fact that I am given this consultant and I had no say in his or her selection. Increasingly, there is going to have to be a separation of that process. In fact, more and more compensation consultants feel uncomfortable being hired by the CEO to work with the compensation committee. How can you truly be objective when your paycheck is coming from the individual for whom you're supposed to be studying the compensation package?
WHO'S PAYING WHOM?
Wriston: Where do the paychecks come from if the comp committee hire shim?
Hanson: Well, they still come from the company, but I think the compensation committee should certainly be doing the interviewing and selection.
Wriston: Then the paycheck doesn't matter?
Hanson: Let's just start with the premise that most CEOs also happen to be chairmen of the board. Is it appropriate for the CEO who is the employee to be hiring the compensation consultant that is going to be providing input?
Wriston: Well, let's just assume the comp committee hires him, okay, and the company pays the check. Does that make any difference to the consultant?
Nell Minow (International Shareholders Services): Absolutely.
Wriston: I don't think it makes the faintest difference.
Minow: I think it makes all the difference in the world.
Wriston: I don't buy that for a minute. Who pays the bill? The corporation pays the bill. And if I'm a consultant, I don't care who hired me. All I care is whether the check clears.
Minow: Well, the check is not going to clear if the compensation committee fires you. As long as they've got the power to hire and fire--
Wriston: It doesn't make any difference. Unless the people in the comp committee personally pay the thing, what difference does it make? You're a consultant, do you care who pays you?
Meredith: It doesn't make a bit of difference to me.
Minow: Do you care who hires you?
Meredith: It doesn't make a bit of difference to me who does the hiring. What our role is, is to try and help management run the business better and to advise them on the design of pay systems and the reinforcement of the kind of performance you want. That is the best way to get it done.
I frankly have a Herculean problem thinking that a bunch of directors can tell the CEO how the best ought to manage the company. If you can, then you ought to be the CEO, not the director of the company. It's absolutely ludicrous.
Hanson: Then why don't you do away with the board of directors?
Meredith: To check and balance.
Minow: Where's the check and where's the balance? You're describing a check without a balance.
Wriston: The balance is that you have to pick a CEO.
THE VALUE OF COMMITTEES
Stern: Boards of directors have very valuable committees who understand what their true assignments are. There is a finance committee, there is an audit committee, there's a compensation committee. Each of those committee chairmen understand that they have a supranormal responsibility and that the outside specialist is hired by the chairman of the compensation committee with uniform acceptance by the rest of the compensation committee. The judgments that are made by that person will carry weight with the board, and the CEO will agree to the results. We're not talking about things that are very extreme at the very top and the very bottom.
The differences here are more in substance than in form. As for the issues that you are raising, even though I sometimes flap my wings here and I get very excited, I hate to admit it, but I agree with about 75 percent of what you say. You're only 25 percent wrong.
Hanson: That's a very small part of being wrong. Our feeling very definitely is the compensation committee should have a say on the hiring of a consultant. You are going to be seeing this coming in increased volume and frequency in the future, not simply from the CalPERS but from a number of shareholders, and that is that they would like to see outside directors evaluate the CEO.
But again, the shareholders should not set the CEO salaries. The public sector model of the issue shows that it simply does not work. Dale Hanson is the CEO of a $65 billion pension system, and I am paid exactly the same salary whether I perform well or I perform poorly. I am paid exactly like another director of another state agency, like we've all been cut out of little cookie cutters.
But you know, we talk about committees sitting down and saying, "Gee, we ought to be at the top corridor, based on our peers." That same committee should be looking at it on a total return basis and say, "But my God, we're sitting 472nd out of the S&P 500 and what we ought to do is tank the CEO."
THE CEO AS SHAREHOLDER
J.P. Donlon (CE): Dale, obviously, in the first go around, you didn't like what you saw at ITT. What is it that you do like to see?
Hanson: CEO compensation should be highly correlated to what is happening to shareholder value. If there is not a correlation between executive compensation and creation of shareholder wealth, then I think we really do not have a suitable process.
I am troubled in the area of stock options only in the fact that in many cases, unless there is some form of an indexation on options, it's basically a free ride. If the person that has the stellar performance is going to be able to exercise that option, the person who's had substellar performance will probably also be able to exercise it because the market is just rocking that company along.
Wriston: What do you mean by indexation?
Hanson: That you're looking at what the entire market is doing as far as moving up, and is this company just riding along the free ride, or is it that individual's performance that has brought the value of the stock up?
Robert G. Paul (Allen Group): If the market goes down 1,000 points, 30 percent, then are you saying the option prices should be reduced by that?
Hanson: The pricing of options gets into another issue: If you're constantly resetting that price, then what is the long-term incentive in that process? Gee, you couldn't make it there, so we're going to bring the hurdle bar down two feet and see if you can do it there!
Meredith: But the reload options that you're talking about--in terms of taking the old options and granting new ones at a reload price--represent 3 or 4 percent of corporate practice today. That's not a common practice, and it's one that's looked on with great dismay in most corporate boardrooms I know about.
Stern: If the managers took part of their bonuses each year and used that to buy stock options with a rising exercise price, but they did it every year, they would have something real to lose. That's number one.
The second thing is, I want to build in a rising exercise price on those options because shareholders are entitled to the first returns; only the excess returns for superior performance is what management should participate in.
Wriston: Aren't management shareholders?
Minow: If they are shareholders, then let them profit as shareholders. Only then should they get those returns.
Stern: Come on, we're talking about two different types of people here! You're talking about the very senior management, and I'm talking abuot people who are two or three direct reports down who participate too. It's something that appeals more broadly than just to the very senior management.
Of course, it has to be something that is not just a giveaway, but something that provides a real incentive for performance. If the person is going to be treated like a shareholder, then it goes up or down independent of that person's activities. That's not an example of pay for performance.
Wriston: I just don't believe that short-term thinking is that widespread among senior management. You might have seen that once in one company.
Stern: No, I haven't! I've worked for over 2,000 companies, and--
Wriston: Really, 2,000 companies? Can't you keep a job?
Stern: With respect, Mr. Wriston, it happens a lot. About 85 percent of total comp for people who are within three direct reports from the top takes the form of senior liability claims on the company. That's wages, retirement benefits, and medical benefits. If pay for performance is going to become an appropriate incentive structure, we have to change 85/15 to at least 50/50. I cannot get people to cut their salaries to get the 50/50. So what I'm willing to do is enlarge the potential bonus for earning superior returns, however measured. He [Meredith] has a technique, I have a technique, someone else has a technique. Whatever the technique is, we're going to give people a greater bonus for achieving it.
If the lion's share of the bonus is put into a bonus bank, and they only get one third of it for the year and the other two thirds is subject to negative charges if they underperform in future years, you can be darned sure people are going to have a longer term perspective and be interested in sustaining it. Every year a new bonus goes into the bonus bank. They buy more options with it, and also they're building up a very handsome return.
Arnold Pollard (CE): Joel, aren't you kidding yourself in one of your fundamental premises? You're saying that employees should be forced, in effect, to take a significant percentage of their annual bonus--which might be set at a higher total return to accommodate your plan--and reinvest them in shares. Well, what's the difference between getting a nominal "bigger" dollar bonus, all of you which you can't have and some of which must be reinvested in shares, versus getting paid a smaller bonus with options included in the first place?
Stern: Gee, I though you were much friendlier when your question began. I'm surprised nobody's nicer to me, given my lovely personality. But I'll try to answer your question anyway.
I have great fear that people might operate for the short run. Right now, people get bonuses based on current year performance, and they can take their check and walk. I want to make sure they really sustain a change in the value of the company.
The payoff for people with a rising exercise price such as we referred to earlier, if they do well, should be about $22 for every dollar they invest in those options. If they do well. But they have to stay 10 years to do it. They have to keep up the good performance for a long time.
Meredith: But in the real world, they won't let you cut the 85 percent of the cost that's fixed on an arbitrary, sign-it-up basis.
Alan Miller: It should be mandatory that you cut it to a 50 percent fixed cost. All it really means is you're increasing the total compensation equation because you can't get away with paying substandard salaries involuntarily.
Stern: My plan is what I call a value-sharing plan. The only way that these people will earn higher compensation is if the incremental performance is quite substantial. The shareholders can't lose under a plan like this.
Paul: If management is presented with that program, they will take voluntary pay cuts.
Meredith: Voluntary, yes, mandatory, no.
Paul: No, if you let it be known that this is the program they'll be in if they want to be an executive of the company, they're going to do it.
Stern: People don't have to reduce their compensation for this thing that we're talking about to work. We're suggesting that we don't want to have to go into a company and say to people, we're going to have to change your culture and attitude about compensation. We're simply saying listen, if you think the prospects here are excellent, we want you to participate in the value that's generated from those improved prospects. I see nothing wrong with that approach to the problem.
Alan Miller: The nonrisk takers will leave. You will have less people to talk to.
Wriston: The top executive should gamble a large percentage of the compensation. But put down three or four levels with a person with a spouse and three kids, you get into real problems. The only way you do it is to pay more money. So what they do is they change the plan in the middle of the recession.
Richard Miller (Willis Corroon): We did that back in the last recession for the top three levels of management. And it was a killer. It was the worst morale killer that I've ever seen.
Stern: I'm on the board of a company that had that problem. We wrote a memorandum to our employees saying we have a problem now, and there are two choices to us: We can lay off a significant percentage of the salaried work force or we can take a pay freeze. We of the board would like to do a freeze instead of laying people off. And there was no problem.
Hanson: Well, public employees face this about every two years and, obviously, particularly now in a recessionary period, it's common that the first thing you're going to look at is not freezing but cutting salaries. I arrived in California in 1987, and I'm on board for of all 30 days, and the human resources person came to me and said it's time for management bonuses. You have 33 managers and you have $5,000 lump sum to distribute.
I looked at him and said, "Surely you jest." He said, "I'm not kidding and don't call me Shirley." That is no way to have incentives. What do I say? "Oh, by the way, you are going to be paid 10 percent less than what you were paid the previous year. I have no merit I can give you. You can't even cash in your vacation because the state has a budget problem." I made a conscious decision to work in the public sector. But by the same token, I certainly would not subject corporate America to that mindset.
Meredith: But that's what you're doing when you're hiring their consultant for them.
Hanson: I totally disagree with you. Directors are there to represent the interests of shareholders. They are there to hire the CEO. They are there to evaluate the CEO. And how many directors evaluate CEOs today? Very few.
Meredith: You're working from a bad database.
Hanson: Well, good, I would like to see your database!
Richard Miller: I've probably hired every consultant that our company has used since I became the chief executive officer some 23 years ago, and I've never had a complaint before from any of the committees because I felt that the consultants we were hiring were professionals. The board members felt the same way. If they weren't happy, they shouldn't have elected me chief executive. All consultants are professionals, and they're going to report in an independent manner regardless of who selected them.
Hanson: We have now come full circle to the point where we're saying we all like the emperor's new clothes, and that's garbage. This would not be written up monthly in every major magazine in the country if there was not a problem. All of a sudden, I'm hearing no problem, it ain't broke, don't fix it. That's crap.
Minow: I absolutely agree with Dale that shareholders should not set pay. And I also think that the compensation committee should be made up of independent outside directors. We looked at one company where the head of the compensation committee was the CEO's father!
It's important for shareholders to get involved in making sure that the directors are good, that they do a good job, that there are enough independent directors to provide some constructive feedback. It's no coincidence that overpaid directors have overpaid CEOs.
Wriston: It's not that directors are stupid or don't work for the shareholders. Some of that is true, but most of it is smoke. The real problem directors face is liability in litigation. A year ago I told one of my boards that it was a seminal day in my life: My wife's lawsuits against her as a corporate director exceeded mine on that day and were up to $500 million. So when you talk about a director's compensation, there isn't anything you can pay him or her that will compensate for that liability. Unless you've been sued for $100 million, you don't know what the bell you're talking about.
Minow: But do the lawsuits against you and your wife really deter you from accepting a directorship? When was the last time any director was personally liable?
Wriston: Every day that you're alive.
Minow: I don't believe that's true. Chancellor Allen of the Delaware Court, who presides over more of these cases than anyone else in the world, says that a director has a better change of being hit by lightning than being found personally liable.
Wriston: Yeah, well just try taking that chance to the bank. It's nice to say that as an observer, but it's another thing when the marshall walks in with a damned subpoena, believe me.
BUT SERIOUSLY . . .
Richard Miller: There's a lot of greed out there, but in general, most boards have very hard-working directors. They take their jobs seriously. The committee chairmen take their jobs seriously. For the most part, they do damned good jobs.
I'm happy with the way things have been set. Of course, there are exceptions. In every field and in every part of business there are always going to be exceptions.
Donlon: What do you think will most drive compensation considerations in the future?
Richard Miller: I would like to see heavy stock options for CEOs. I am always disappointed when I pick up a proxy, and I see that the chairman who has been chairman for five or 10 years has 5,000 shares of stock, and he's been taking home $1.5 million a year. He's cashed in the options that he's gotten. That's the way they do things in Great Britain and in other parts of the world, and they have this partly because of the tax laws. But not in America. People should have a bulk of their personal net worth involved in the stock of the company that they lead. My personal net worth, the bulk of it, is in Willis Corroon shares, and it's been that way all my business career.
Stern: My interest in the subject really came about by trying to understand the phenomena of the 1970s and 80s--the unfriendly takeovers. I came to the conclusion that the underperformance of corporate America was more a function of this institutional government regulatory phenomenon that was institutionalized by the act in the 1930s. And that the incentives for improved performance that we're really getting to here really originated with the threat of an unfriendly takeover.
When that went bye-bye, a lot of people said well, I guess we don't have to worry. What's fascinating is that we're lucky the Dale Hansons of the world have come along and said you do have to worry. Because I really care about whether or not shareholder value maximization is an issue of importance to you--the CEO--or a member of the board of directors.
The reason why we should be concerned about how directors are paid and how the CEO is paid is because we should be interested in whether or not goals are set in terms of value maximization. Our interest is really not in how people get paid. It doesn't matter that Michael Eisner makes a lot of money as long as it's associated with outstanding performance. The real focus should be on whether or not people are being motivated to perform well, and then we can worry about how well they get paid. You can compare it to baseball players. Everybody's so concerned about whether those guys are getting overpaid. I liked Don Mattingly's comment when he was asked if he was worth $3 million a year. He said, "Well, the alternative is worse. If I don't get it, it goes to George [Steinbrenner, former general partner of the New York Yankees]." In other words, there is money available from all these TV revenues, and all they're doing is allocating funds.
Hanson: We have a number of CEOs who deliver a tremendous amount of value to shareholders for what they're being compensated. Shareholders and directors and clearly the media will be focusing more and more on compensation--it is becoming, who will be the poster child of the year? At least over the near future, Steve Ross, you've got yourself locked up closely. You're not going to hear us complain about Michael Eisner. Michael Eisner has delivered a tremendous amount of value to the shareholders. He has a compensation package that is at risk. If he does not hit certain targets, he's not going to be sitting with the godzillion dollars.
But there are others that have for a long time been poor performers who continued to have high levels of compensation, and at some point in time, the board is going to say, what are we paying this person for? Is this individual really and truly providing value to shareholders? Or is he basically only functioning for himself or herself? This is going to be an issue for the 90s in corporate governance, and we would be foolish if we didn't think that. With the amount of attention the media gives to this, it's become a feeding frenzy.
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|Title Annotation:||CE Roundtable; chief executive officer|
|Publication:||Chief Executive (U.S.)|
|Article Type:||Panel Discussion|
|Date:||Jan 1, 1992|
|Previous Article:||Bold thinking.|
|Next Article:||The duality principle.|