Opinion: Demand executive ROI
- 22 April, 2003 10:00
At last, we are starting to see shareholders with backbone and more than a modicum of common sense. Recently, Hewlett-Packard Co. shareholders passed a nonbinding recommendation asking the company's directors to obtain stockholder approval of large executive severance packages. HP's management, which had lobbied hard against the proposal, issued a terse statement saying that it would "duly consider" the recommendation.
Governing bodies tend to ignore nonbinding referendums, so the shareholders will need the backing of the board. But many boards of directors function as little more than rubber stamps for pay increases or protections sought by the management team. SEC and accounting reforms are supposed to snap these boards to attention, but even among the spectacular ruins of companies such as Tyco International Ltd., Enron Corp. and Adelphia Communications Corp., we see their boards continuing to go to bat for C-level managers, requesting astronomical salaries, bonuses and severance packages even as creditors line up on one side and laid-off workers struggle to retain their homes on the other.
Those boards and some bankruptcy court judges may have taken leave of their senses, but thankfully, investors are starting to regain theirs. Bids to gain control over executive compensation have either been accepted or are under consideration at companies such as Alcoa Inc., Bank of America Corp., Citigroup Inc., General Electric Co., Norfolk Southern Railway Co., Tyco and United Technologies Corp. Various investor groups, including The Conference Board, the Investor Responsibility Research Center, the Pension Rights Center and Institutional Shareholder Services, are starting to press for reform. Even Congress is getting warmed up. "It's insulting when they lay off thousands of people and then pay top executives millions of dollars in raises," said an outraged Sen. John McCain (R.-Ariz.) recently.
He's right. Executive pay is out of control. The average severance for CEOs at the country's largest companies during 2001 and 2002 was US$16.5 million, according to The Corporate Library. A recent analysis of CEO compensation at the 100 largest U.S. companies by USA Today and the Investor Responsibility Research Center found that CEO salaries and bonuses jumped 15 percent in 2002, while rank-and-file workers averaged only a 3.2 percent gain. By some estimates, CEOs now make more than 450 times what the average worker earns.
It is insulting when companies richly reward high-level executives who have basically been fired and then begrudgingly scrape up minimal severance for laid-off workers. If we really believe that much of a company's success rides on the shoulders of the CEO and his team, then the reverse ought to play out. If the company stumbles, then the blame should fall squarely on the executive team. Their parachute strings should be severed, not reinforced with platinum.
Why should you care? Because excessive compensation can undermine the financial strength of the companies you work for and with. It can wreak havoc with service levels and worker morale. What kind of message does it send when your vendor heaps another six- or seven-figure bonus on an already richly compensated executive but announces in a separate press release that, to cut costs, it will whack off another chunk of its service and support division? Or perhaps it expands your sales rep's territory, or charges for or automates a service you would rather it didn't.
High tech -- and, by association, IT -- has been hit especially hard over the past three years. At a time when ROI is king and cost-cutting is the new Zen, we should demand that these values extend to the executive suite. Leadership starts at the top.