In too many boardrooms across North America, executive compensation has descended into the farce of rewarding CEOs for super-human abilities they don’t possess, on the basis of performance they frequently didn’t achieve, with money from compensation committees that is not theirs.
Do a search on the Internet for the highest paid CEOs and shareholder outrage, and the name Yahoo soon pops up. The compensation of the company’s now former CEO Terry Semel featured prominently in a recent AP roundup on executive pay. I was interviewed by the report’s author and had a few comments in the piece about CEO compensation in general and about the boardroom culture that permits its abuses. Yahoo lagged behind Google in profit growth and stock performance. Still, that did not prevent the board from awarding Mr. Semel a 2006 package of more than $71 million, according to the AP survey. That amount raised the ire of investors. This week Yahoo announced that Jerry Yang, a co-founder of the company, will replace Mr. Semel as CEO. Mr. Semel’s departure from the top slot was not a surprising development.
What is surprising is that Mr. Semel’s previous pay package of a neck-snapping $230 million prompted barely a mutter. That’s one of the things about CEO compensation. Reactions to it can change very fast. Investors might not care how much a CEO receives when the stock is performing well. When shareholders are giddy, the sky seems to be the limit. But when the party dies down and the reality of lower stock levels hits, they can get very testy. What is missing is the recognition that a culture of excess on the part of directors, which seems to dominate too many North American boardrooms, like a boorish in-law at the family reunion, once arrived is slow to depart. Yahoo had such a culture.
Indeed, nothing reveals the folly of its compensation regime more starkly than the loony idea that it needed to enrich the fortunes awarded to its senior executives by giving them something called retention pay. Each of Yahoo’s top executives —Terry Semel, Farzad Nazem and Susan Decker— received a bonus for staying with the company. Think about this for a moment. They collectively own millions of Yahoo shares. Is it reasonable that, with so much invested, they would have to receive additional incentive to stay with the company and try to improve the value of their holdings? What better than a top position inside the company to contribute to your own financial growth? Yahoo’s board would have been better off taking the stance that if someone with that kind of stake still needs extra inducement to stay, it has the wrong person in the job.
But in a contemporary corporate culture where CEOs seem constantly to be crying out “motivate me,” ever obliging compensation committees, aided by clever pay consultants whose creativity would make a science fiction writer seem dull, can dream up endless reasons to give more of the store away to management. They seem considerably more challenged when it comes to holding back. Another interesting sidebar in the Yahoo compensation story is how much the board, and management, were obsessed with the subject. Last year (the most recent figures available) Yahoo’s compensation committee met on 12 occasions. That’s even more than its audit committee.
The huge sums being paid out to Yahoo’s executives prompted the company to go back to shareholders this year to ask that more stock be earmarked for options purposes and prescribed vesting periods be eliminated for restricted stock. They had no trouble getting support for the widened gravy train. That’s another part of the problem, by the way: there doesn’t seem to be a culture that understands the concept of “too much,” or even enough, when it comes to executive compensation. No form of contortion seems to be beyond the ability of boards and management to twist themselves into in order to try to show themselves deserving of still more. At a certain point, it becomes as demeaning to witness as it should be to engage in.
Yahoo, like the case of Home Depot and Bob Nardelli before it, provides yet another high profile illustration that Pharaonic pay does not always translate into superior results, and —as I have suggested and on these pages and elsewhere— that there is no proof that even superior results cannot be achieved by more modest compensation.
For the privilege of paying its CEO nearly a third of a billion dollars over the past two years ($451 million since 2001), Yahoo has seen its growth rate decline and its stock gains flag. Its brand has been eclipsed by Google, which has established itself as the preeminent knowledge factory on the Internet. By any reasonable standard, such performance should have been available for far less. But the question of whether boards really have to pay that much for the performance being sought never occurs in many boardrooms. And Yahoo’s board, like others, had to be hit with an onslaught of shareholder anger before it got the message and acted.
When wildly excessive and unjustified levels of CEO pay are the product of the best thinking in Yahoo’s boardroom, you have to wonder what other broader strategic decisions on the part of directors are equally lacking in sound judgment and vision. One already seems to be taking shape —appointing Mr. Yang, who is 38 and has no experience running a publicly traded company, much less one with the profile and capitalization of Yahoo, to the top executive post. Though clearly not intended as such, I suspect the move may be a harbinger that Yahoo’s days as a stand-alone entity under its current ownership configuration may be numbered.
As noted previously, CEO compensation was not always like this. It has been transformed into an instrument that, while creating a new class of super rich, is also undermining public respect for the institution of modern business and the economic system that underpins it. But then the current class of CEOs and directors don’t really see themselves, much less act, as guardians of capitalism for the well-being of future generations. They have turned a relatively minor aspect of business decision-making —executive pay— into a high profile, headline-grabbing lightning rod that has become an emblem to much of society of everything that is wrong with business and its self-aggrandizing leaders.
In too many boardrooms across North America these days, executive compensation has descended into the farce of rewarding CEOs for super-human abilities they don’t possess, on the basis of performance they frequently didn’t achieve, with money from compensation committees that is not theirs.
No wonder the scam is hard to stop.