The Michael Jordan Principle(A)
“It’s the Michael Jordan Principle. If he can get $30 million, I have to get it.”
— Joseph Bachelder, CEO compensation negotiator
We, the body politic, have utterly failed to rein in outrageous executive pay packages. Since CEO pay began to skyrocket in the late 1970s, shareholders and the SEC’s efforts to restrain it through limitations on golden parachutes, increased disclosure, tax incentives have all perversely backfired. (For example, increased disclosure allowed CEOs to see what their peers were making and use that negotiate more effectively.) The greed, self-entitlement and cronyism that drive these paychecks through the roof have foiled us every time. You can’t shame the shameless.
The premise underlying today’s executive excesses is that CEOs and other senior execs deserve to be compensated on a commission basis for all the big deals they’re pulling off, as though they were comparable to athletes and rock stars. Harvey Golub, the CEO of American Express in the 1990s, made $57 million salary, bonus and restricted stock over eight years, exercised options worth $92 million and upon retiring, was granted another 990,000 in options. Pointing to the $55 billion in increased market cap during his tenure, he asked the Wall Street Journal, “How much of that $55 billion should I get?”
To buy into this, one has to agree that Golub’s made a truly outsized contribution his company’s rise in market cap, rather than something like, say, a terrific bull market or the hard work and talent of thousands of employees. But many CEOs want – and get it – both ways, negotiating killer packages that pay off even when performance lags or thousands are laid off. Perhaps we’re supposed to console ourselves with the thought of how much worse things might have been if someone else other than the former Pfizer CEO Hank McKinnell ($83 million in pension benefits) had presided over Pfizer’s 37% drop in stock price that coincided with his five-year tenure.
Viewed through the lens of corporate governance activists , if the board doesn’t have the stuff to link pay to performance, then the power balance is out of whack. But for social investors, and much of the public, something bigger is going on. The obscene amounts of wealth that executives make compared to the rest of us tears away at our tattered social fabric. The richest 1 percent of Americans held 32 percent of the nation’s wealth in 2001 (not even counting the Forbes 400 billionaires, who control roughly another 2 percent of the nation’s wealth).
So we have to simply become cleverer about shaming the shameless. In a roundabout way, that is the hope embedded in a shareholder resolution at Citigroup filed by the American Federation of State, County and Municipal Employees (AFSCME), and co-sponsored by Trillium. It calls for an annual shareholder vote to ratify the compensation of named executive officers, and reduction of ambiguity around the size of the package. The vote would be advisory only, but the thinking is that Citigroup (and 60+ other companies that will receive this resolution this year) will have at least the PR sense not to propose compensation packages so fat that they’ll get rejected by shareholders. Last year, the resolutions received support in the range of 35 to 45% at seven companies. Advisory votes are already standard practice in the U.K., Australia, the Netherlands and Sweden. They might just provide the forum needed to embed some reason and economic justice into compensation system gone crazy.
“Behind Executive Pay, Decades of Failed Restraints,” Wall Street Journal, October 12, 2006; “Study Finds Wealth Inequality Is Widening Worldwide ,” New York Times, December 6, 2006; Executive Compensation vs. Workers: An Overview of Wages, Pensions and Health Benefits of Rank-and-File Workers and Sky High Executive Pay, Prepared by Democratic Staff of the Financial Services Committee, October 24, 2006.