Homer & Friends on Executive Compensation and Say on Pay – Part 1
It's that time of year, March Madness, and by that I mean the annual wave of indignation and anger reacting to executive compensation disclosure reported, over and over, in mainstream media summaries and recaps of summaries, etc.Â Since we are only a small brook here, not a mainstream, we won't recap the recap, we will actually front run exec comp season.Â We won't evenÂ get mad, we'll just get even, with another peerless panel discussion featuring Homer Simpson (who needs no introduction), Gordon Gekko (soon to appear in a long awaited sequel to Wall Street) and Henry David Thoreau â not writing any sequels, but Walden Pond is still there, I drove by on MLK Day.
Gekko:Â I can't understand what all the fuss is about.Â We've already been listening to a year of whining about Wall Street salaries just because the economy had a little hiccup and a few banking types took some TARP money.Â So a CEO makes a few million bucks, or even a few hundred million.Â That's a market economy.Â Nobody complains when Alex Rodriguez signs a quarter billion dollar contract or Arnold Schwarzenegger gets $100 million for delivering twenty lines in near-Austrian and running around in a loin cloth.Â
Homer:Â So that was Australian, huh.Â Why do these CEOs put their salaries in the paper, do they just like to rub it in?
Gekko:Â Public companies have to disclose executive compensation and material contracts.Â The press gets the information from the SEC filings, which are on the web.
Thoreau:Â It is truly proper that the good man living a simple life on $40,000 a year avoids the deadly sin of envy and does not become angry with A-Rod or Arnold, but why does he feel differently about Jeff Immelt and what could any of these people possibly do with hundreds and hundreds of millions of dollars? It just doesn't seem possible to spend that much.
Gekko:Â Prices have changed in the past one hundered fifty years,Â HD.Â My shack in the Hamptons cost $100 Million compared to the $30 you paid for your place on Walden Pond.Â Hard to say why the exec comp generates so much more anger than entertainers.Â Maybe it's just the media stirring up trouble.Â Maybe the angry guy has a dull job with GE and doesn't like the fact that Jeff makes a thousand times more than he does.Â Maybe he just thinks the CEO job isn't worth it, after all, it's not like A-Rod or Arnold, where you can just count the extra fannies in the seats.
Thoreau:Â Please call me Henry.Â If the value of the job is hard to measure, why does the Board pay the CEO so much?Â Aren't they supposed to represent the shareholders?
Gekko:Â Competition.Â If Acme won't pay the going rate, then the Acme CEO, Lance Gold, will jump to Baker.
Homer:Â Â Let him jump, I'll take the job at Acme for half the pay, plus unlimited donuts.
Thoreau:Â I'm not sure if the Acme shareholders are ready for you Homer, but seriously, how does the board know Lance Gold is worth an extra $ ten million just because Baker is willing to pay it.Â True,Â Acme had a great year, but that's measuring the economy, the sector, all the other employees and a million other factors, not justÂ Lance.Â Besides, Baker is a much bigger company, shouldn't the Acme Board consider letting Lance go if he really has a better offer and hiring a cheaper replacement, maybe promote from within?
Gekko:Â Lance was responsible for hiring and inspiring all those Acme employees, plus what's a few million between friends?Â Why would the Acme Comp Committee want the aggravation of negotiating from scratch with a new face and the potential embarrassment of losing Lance then having a bad year with a new CEO?
Thoreau:Â So the market for executives is a little more complicated than the market for corn?
Gekko:Â Well, it's a lot more complicated for the CEOs.Â For the other executives, the CEO usually has a dominant voice in hiring and firing.Â The simpler process, plus the fact that the CEO usually has an eye on the bottom line, keeps the market for non-CEOs a little bit closer to that market for corn.Â It's not unusual for non-CEOs to make a fortune, especially in the financial sector, but many of those jobs involve pay that is highly performance based.Â A small trading unit that has a great year (and performance in these jobs is closely measured, often to the point where individuals or small groups within a firm will squabble over credit for a particular deal or trade) had better get compensated, or it really will move to a rival firm.Â It's not that much different than the great salesperson who makes a bundle working on commission while his or her less gifted peers are struggling to get by.
Homer: Forget the non-CEOs, tell me about the donuts, I mean the CEOs.
Continued in Part 2