How Corporations Should Compensate CEOs

April 1-2012

The 2008 meltdown and bonus hi jinks caused private  investors to lose confidence in Corporate and Wall Street compensation practices. 

Individual investors watched failure being rewarded with outsize bonus packages while their 401Ks became 201Ks.

If you and I owned the business, how did CEOs and compliant Boards get away with this ?

Is this how capitalism is supposed to function ?…or…is this a perversion of capitalism called  What are you gonna do about it ? ..ism

Obviously CEO compensation at public corporations  is seriously out of step with our perception of fairness.  As the power of individual investors, as owners,  has become  diffused to the point of irrelevency,  the power of entrenched insiders has filled the vacuum.

This post outlines my thinking on how corporate CEOs and managers would  be compensated in a fair world and on a level playing field.

 I do not propose how to implement these ideas because I have no idea how. It would take an enlightened CEO, a white knight or someone with the firepower of a Carl Icahn to effect needed changes. 

To my way of thinking there are two types of CEOs….INNOVATORS  and CONSERVATORS.

For example, here are four well known names.  Under which heading would you place  Steve Jobs,  (Apple ),  Larry Ellison ( Oracle ),   Vikram Pandit ( Citicorp )  and Dick Grasso (ex  NY Stock Exchange ) ? 

In my opinion, INNOVATORS  use power to create change and their reward is the very process of achieving delineated excellence. 

CONSERVATORS use their power to maintain the corporate status quo and trust that their reward will be based on recognition of their ability to “shepherd”  their corporation over time through a dangerous world with an acceptable return on investment.  Their actions tend to be  based on accepted precedent.

Books are written about how  INNOVATORS gain power. 

How CONSERVATORS  gain power is shrouded by the clouds obscuring  an outsiders view. It takes the right mix  of education, background,  social  skills, absence of  enemies and almost Dailai Lama  type luck to emerge as the consensus selection at the corporate pinnacle.  According to Carl Icahn very many of the  unsuccessful CEOs he encounters tend to be ” nice guys “.

My basic premise is that in a world that craves justice and transparency, INNOVATORS AND CONSERVATORS  and the teams they lead should be compensated differently.  

CONSERVATOR  CEOs and their top five managers should be paid a multiple of the lowest hourly wage paid by their corporation.  I don’t care whether the multiple is 100 x the minimum hourly wage or 500 x etc. ( no overtime ).  I just want every investor to know what the multiple is and what the dollar result  is, so that they  can be  used as the starting point for determining  fair CEO compensation and for comparison.  No rewards,  just  those perks accorded employees at large, plus reasonable differences ( example – a separate dining room reserved for entertaining business guests ).

No options.  If you want to buy stock, do it the way I do it….do it out of your take home pay.  Why should I make it easy for you to cross the line from employee to owner… entrenched owner… entrenched owner surrounded by a compliant Board ?. What a slippery slope for me !

Oh … and, by the way…. what does it say about your confidence in your company and yourself as a CEO leader if you don’t purchase stock regularly enough to be considered an insider accumulator. …or do sell stock often enough to be considered a distributor. ?

Innovator  CEOs and their top five managers should also be paid the hourly multiple PLUS  A GRID PERCENTAGE  AMOUNT OF BEFORE TAX PROFITS .   For instance on 200 million profit this could be $4 million ( 2% ) for the CEO  to split between himself and his team.   Same rules as with Conservators. No perks other than those accorded employees at large.

How do you become an INNOVATOR ?

Easy… Every annual report will contain a section which gives management the opportunity to state its case to shareholders on why the year  under review should be considered an innovative season with playoff money. The driving concept being  What has the CEO and his team done to delineate the corporation from its competition by creating or widening a sustainable competitive advantage.

Whether or not innovator status is granted will be determined by the proxy vote.  Yes, the proxy vote !  You and I, as owners, will decide to accept or reject Management’s request for Innovator status.  If the request is approved by proxy vote, the status expires in one year and renewal will be a result of next years annual report / proxy vote process.

I do not wish to denigrate Conservators.  They are the bedrock norm.  Innovator status is elite status…at least for one year.  But, I would almost be willing to wager that there would be very few flip flops in status from year to year.

What will all of this accomplish. ?

1- You can be certain that if CEO pay is based on a multiple, hourly wages will increase precisely to the point where they do no  harm the   corporations competitive position.  That in itself will arrest the growth of the widening  haves versus have not gap.

2- More focus on competition and what can be done to delineate the corporation as elite.

3- Increased effort to create  a corporate culture capable of spawning a self perpetuating meritocracy.

4- More visionary use of cash including greater emphasis on R & D.

5- More focused effort on how to identify, recruit and train innovative and entrepreneurial thinkers

6 – Investors can again think of themselves as owners and know that their are no insider crony deals which draw off a substantial part of their profit for the benefit of a self serving few.

OK …Maybe I’ve oversimplified the solution.  But, I am absolutely certain that the above ideas ( as rough as they are ) take better aim at fairness than the CEO compensation systems we have in place, which are far too secretive and complicated for an owner ( investor ) to understand and control.

Agree ?

Richard Maurice Gore

3 Responses to “How Corporations Should Compensate CEOs”

  1. downstairs Says:

    Some truly prize posts on this site, saved to fav.

  2. Shivam Says:

    Who approved the apporx $7M compensation for Robles… the “owners”? NO! I am an “owner” and certainly don’t remember being able to make an input on this. As an association, USAA’s compensation for senior executives should not be compared to publicly traded companies. It’s a different ball game. Robles may be a GREAT guy…and makes a great face/front man for the company…but I guarantee you there are thousands of retired 2-3 star general/flag officer that would be happy to read the prepared speeches…look good…and represent USAA for a paltry One Million Bucks a year! To get hired into most any non-entry level job at USAA, you need a “coporate” background. Funny thing is, this doesn’t apply at the top! There haven’t been any brilliant business ideas implemented by the top executives only a continuous change to the ground rules in regard to who qualifies for membership, i.e. We want to make more money , OK lets open the membership to a greater number of previously non-eligibles . WOW now we look like geniuses, because Revenue and Profit have increased! My input for senior management: Next time you want a bigger secret executive bonus, why not suggest including Police Officers and Firemen/women as eligible members after all, they are uniformed AND heros. Much more deserving of USAA membership than a 2nd, 3rd, 4th generation family member who never served! Think of the great Marketing Opportunity!!!!

  3. Thurman Frerking Says:

    Wicked post!

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