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Executive Pay

Wednesday, October 21st, 2009

Executive Pay

Who Should We Really Blame for the Unfair, Excessive Pay of Underperforming Executives?

With the collapse of our America economy and ongoing recession, hardly a day goes by without reading or hearing about an underperforming chief executive officer of a Fortune 500 company getting bounced out on his ear.

On the sideline, workers and investors of the company are cheering wildly and hoping for a better replacement. Then they read that the incompetent CEO that ruined the company and its stock value is walking away with a sweet going away gift of millions in compensation while the company is losing money and struggling to survive.

According to an analysis done by the Associated Press, more than half of all corporate CEOs in America make $8.3+ million a year. Another analysis showed that CEOs make 179 times as much as a rank-and-file worker.

The golden parachutes are beyond ridiculous. When the offending CEO is getting $20 million for running the company into the ground, it makes no sense whatsoever.

Please, do not be so lame as to suggest that it is written in his contract that he gets the payout of a lifetime for screwing up. Who exactly allowed that clause in the contract to be written? It surely was not done by the CEO’s authority. You could and should blame the Board of Directors for such a stupid clause when they have no idea of how the CEO would actually perform.

Common sense would dictate that it makes sense to pay bonuses to CEOs for producing positive results, not negative results. Any other arrangement borders on huge risk because there is no guarantee that a CEO will produce positive results, especially if he is walking into a distressed situation at the outset.

Should the CEO in a distressed situation lift the company to profitability and excess profit, he should share in the success. If he then takes the company down the tube with his policies and decisions in the future, there is no way he should be compensated for failing in the process. This would be like burning down your house to get rid of a rat.

So why does this excessive CEO compensation happen? You can lay it right at the feet of the Board of Directors of the company. There is no way a CEO of a major corporation should be hired without the blessing of the members of the Board of Directors.

It is the Board of Directors who are legally charged with the financial viability of the company they are representing. They are the ones who are ultimately accountable; the CEO is responsible for the success or failure of the corporation. The CEO serves at the pleasure of the Board members; the Board members do not serve at the pleasure of the CEO. This is as it should be.

So I keep asking myself two pertinent questions:

1) Are the members of the Board of Directors merely wimps with no backbone to stand up to a controlling, manipulative, strong-willed, egomaniacal CEO? I chose to think not, certainly not in the vast majority of boardrooms.

2) How then is it that these same Board members approve such stupid, outlandish contracts knowing the CEO could run the company into the ground and decimate the value of its stock? Try this answer on for clarity of thought:

What if the offending CEO is allowed to escape accountability with a $20 million, $40 million or $200 million exit bonus. What if each Board of Directors member has been set-up with a secret Swiss bank account, and each director received a kick-back from the CEO of $1 million, all tax free and hidden by being deposited directly by a CEOs dummy corporation to a Swiss bank account from an offshore account.

I believe this is exactly what might be happening in these kinds of situations. Just as vendors at baseball games can sell out of hot dogs, so can corporate board members sell out the company and its stockholders on their way out.

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