Footnoted: News from the Footnotes about American Corporations
I heard on Marketplace (American Public Media’s radio show) about footnoted.org, where Michelle Leder exposes juicy information about corporations found in the footnotes of their reports. If you’re a shareholder, you might be interested to know how your management is spending your corporation’s money. Here are some fun ones:
- Fred J. Kleisner, Interim President and CEO of Morgans Hotel Group, had to relocate to New York City. The company is paying all his expenses, including a housing allowance of up to $30,000 per month. “Even in Manhattan, that guys you some nice digs.” He also gets a $750K salary with a bonus up to 200% is he meets performance targets.
- For their CEO Michael McGrath, I2 Technology paid nearly $1 million flying him between the company’s offices in Dallas and his home in Maine.
- Countrywide gave CEO David Sambol a $2.7 million promotion bonus shortly before their stock imploded.
- Qwest Communications CEO Edward Mueller’s stepdaughter attends high school in California, but Qwest is based in Denver. But no problem; she’s allowed to use the company’s Falcon 2000 private jet for her commute to school. This could cost Qwest as much as $600K, assuming normal charter rates. In fact, more than half of the CEO’s in a recent study are able to use their corporate jets for personal trips.
- David Peterschmidt is leaving as CEO of Openwave Systems after three years, for which he’ll get a lump-sum payout of $1.5 million and full vesting of his 175,000 shared of restricted stock — also worth about $1.5 million. This was while Openwave’s shares fell by 17%; it has been falling and falling ever since. Meanwhile there has been a shareholder lawsuit, involving Peterschmidt and others, claiming the the stock price dropped because of the company’s options backdating scheme, which encompassed seven years and led the company to restate its financials. In 2007, they lost $197M on revenues of $290M.
It’s good to be CEO.
December 27th, 2007 at 6:45 am
1- Jealousy is a mental disease. It never brings anything good.
2- Fiscal regulations make it advantageous to pay in nature rather than in money. If you consult your package, you’ll find that it’s true for you too. If these regulations were abolished, the CEOs as well as other employees could be paid directly in money, would then care more for its efficient use, and we’d see less waste.
3- Many CEOs certainly do blunders. Lower level employees do, too. We don’t stop paying them for that. Is your outrageous case an outlier or the norm? What is the norm in terms of comparing CEO revenue to company value creation?
4- It’s easy to show big numbers and not put them in perspective. What marginal revenue do CEOs generate for firms in general? How can it be evaluated? How does that compare to their payment?
5- If you know more cost-effective, result-efficient ways to design payment incentives for CEOs, and can argue statistical improvements possible with your method, there are quite a few investing firms in this town who would be interested in shaving millions that way. In this game, a few percent improvements can mean a lot. If you know something others don’t, do like Billy Bean.
PS: I like your blog.
December 27th, 2007 at 12:29 pm
Hi, Fare. By “jealousy” do you mean “envy”? Are you implying that my post is a statement of envy? Nope. The point of my posting was good, clean fun, rather than a statement of ideology. (I can do that too, but this wasn’t an example of it.)
I think giving outgoing CEO’s huge cash prizes for leaving a company, which they often get even when the company did very poorly on their watch, is unlikely to be in the interests of the shareholders. This
happened, on a suitably smaller scale, to one of the companies I co-founded (Object Design, then eXcelon Corp) when the second CEO left, and we all rather resented it, particularly since he did not exactly preside over a hugely successful phase of the company. I don’t see how this is “pay in nature”.
I’m not sure what blunders you’re referring to. I don’t think anything I listed was a blunder. They are cases of CEO’s helping themselves to the corporate till in entertaining ways.
If you really attribute all the profits of these large companies to the CEO personally, then these compensation numbers are often small compared to those profits, indeed. There is a very good discussion of all this in Robert Reich’s “Supercapitalism”, about which I hope to do a blog essay.
I would argue that the usual stock option deal that is presented as an incentive for performance does not work as well as one would think. It encourages the CEO to take big risks that are not in the interest of the company and shareholders, due to its “Heads I win, tails I don’t lose” structure. Make them participate in the downside as well: that would be more result-efficient. Not to mention backdating and repricing scandals.
Re Billy Beane, yes, I’ve read “Moneyball” (fun book!). This, I completely agree with: careful, rational evaluation, and it’s shown to work well. What might be more cost-efficient would be to pick CEO’s more objectively and less based on “star” status (e.g. nobody ever got fired for hiring a famous CEO whose last company did well) (not that board members are held accountable, usually).
December 28th, 2007 at 6:15 pm
I don’t want to put words in Fare’s mouth, but you listed five examples, two of which involved CEOs getting big severance packages after dropping the ball, and three of which involved CEOs receiving money/gifts/perks outside their regular salary. I think Fare was referring to the three examples of corporate jets and living allowances.
I definitely agree that CEO severance packages make no sense. What I really have a hard time understanding is that the boards at the companies paying these huge amounts to bad CEOs always refer to their contractual obligations. That’s all well and good, but who wrote and signed those contracts? It’s not as if the boards aren’t aware that sometime CEOs don’t perform, so I can’t figure out why they continue to do such a poor job of drafting the original contract. Sure, I can see being blindsided once, but not multiple times over a decade or two. It’s like these guys don’t bother reading the news. “We never considered that Michael Eisner would need to be pushed out the door.” “We didn’t realize that Carla Fiorina would make money even if HP tanked.” “Wow, look at what his contract says, I wonder how that got there.” Yeah, right.
December 29th, 2007 at 12:43 pm
Max: Yup, I agree totally. Why do they do it? My speculations: (1) They really, really want to hire this guy and severance is so far in the future that they just don’t put a high priority on it when he asks for it, (2) all the other boards do it so they can just point that out and imply that that means it’s OK, (3) board members are CEO’s of other companies and so have a vested interest in continuing the practice, and (4) board members are very rarely voted out by the shareholders so they can get away with nearly anything.
January 4th, 2008 at 8:21 pm
Just to clarify: by “pay in nature”, François means “pay in kind”.