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Rewarding Failure

Executive Pay Settlements Raise Eyebrows

By Father John Flynn, LC

ROME, NOV. 13, 2007 (Zenit) - Lavish wage and benefits packages for executives have been the target of increasing criticism in the last few years. Nevertheless, defenders of high rewards have argued that the impressive returns of many companies justify the money company leaders receive.

A recent example was Robert Reich's opinion article in the Sept. 14 edition of the Wall Street Journal. Chief executive officer (CEO) pay has risen astronomically, but so have investor returns, argued Reich, professor of public policy at the University of California at Berkeley and former U.S. secretary of labor under President Bill Clinton.

Reich noted that recent data show that the typical CEO of a Fortune 500 company earns an average of $10.8 million. This is more than 364 times the pay of an average employee. Forty years ago, Reich added, top CEOs earned 20 to 30 times what average workers earned.

He contended, however, that the modern corporation depends a lot more nowadays on the abilities of its CEO, and that the high pay levels are generally worth it to investors. Reich opined that the chiefs of large companies these days are less like bureaucrats and more like Hollywood stars, who get a lucrative percentage of the profits.

The validity such arguments have come under severe strain, nevertheless, in the face of multimillion-dollar benefits, often termed golden parachutes, for failed executives.

Golden parachutes

Merrill Lynch, which along with other financial institutions has suffered heavily due to the current financial crisis in the mortgage market, announced that its chief executive, Stan O'Neal, will leave, with benefits totaling around $161.5 million, reported the Wall Street Journal on Oct. 30.

The retirement followed the announcement by the firm of a third-quarter net loss of $2.2 billion and a further $8.4 billion in write-offs due to risky mortgages and loans, reported the article.

Shortly afterward came the news of a write-down of up to $11 billion by Citigroup, followed by the announcement that its chairman and chief executive, Chuck Prince, would retire.

John Gapper, commenting on the news of the two retirements for the Financial Times on Nov. 8, noted that by retiring, instead of being fired, the two executives were allowed to receive multimillion-dollar parachutes. Gapper said that while there is no official news yet, Prince was expected to receive a retirement package of around $40 million.

By rewarding them in this way, in giving them shares they should not have been eligible to collect unless they had performed better, the firms damaged Wall Street, argued Gapper.

It also creates what he said is a "moral hazard," which occurs when it appears there are incentives for people to behave in ways that damage their own institutions or the financial system as a whole.

These two examples are far from being isolated, as the New York Times commented in an April 8 article looking at how failed corporate chiefs were rewarded.

In July last year, Hank McKinnell, Pfizer's chairman and chief executive, resigned with a package worth nearly $200 million. This came after the company lost more than $137 billion in market value during the six years he was in charge.

Then there was the case of Robert Nardelli, the former Home Depot chief executive who was officially dismissed on the first workday of 2007. He received a $210 million exit package for six years of work, during which time the company's stock price had sagged severely.

Give investors a say

An editorial published Oct. 16 by the Financial Times addressed the topic of CEO salaries. A new survey, the newspaper noted, found that a sizable majority of the U.S. CEOs and presidents surveyed think that chief executives get paid too much.

It is true, the editorial continued, that a good CEO can add billions to a company's value. At the same time, a more likely explanation of the over-inflated packages probably lies in the fact that executives of a company with dispersed shareholders have great power to set their own pay. More say over pay levels by investors would be a step forward, the Financial Times concluded.

Dissenting investors complained recently in Australia about high pay packages for the telecom company Telstra, reported the Australian newspaper on Nov. 7. Two-thirds of shareholders' votes at the company's annual general meeting just held in Sydney were against the pay arrangements for chief executive Sol Trujillo and other senior officials.

In spite of what the article termed "the biggest revolt in the three-year history of such votes in Australia," the resolution is not binding, and after the meeting, Telstra chairman Donald McGauchie declared the board would ignore its shareholders' wishes and would continue to pay executives as previously arranged.

Unrest was also reported in Switzerland, reported the Wall Street Journal on May 26. Thomas Minder, a 47-year-old chief executive of small cosmetics manufacturer Trybol AG, is protesting the lack of transparency about CEO pay packages.

Minder is collecting signatures to call a national vote to amend Swiss law in order to ensure companies are obliged to be more transparent and accountable regarding executive compensation.

Similar problems exist in Germany, according to an article published by the Financial Times on Aug. 17. Many companies still hide the costs of pensions and other entitlements, according to Ulrich Hocker, director of the DSW investors' association, at the presentation of the group's 2006 report on executive pay.

The report showed that average earnings for executive board members in the top 30 companies were €1.9 million ($2.7 million), compared with €1.7 million ($2.49 million) in 2005, a rise of 11.7%.

Rising executive salaries in Britain also came under the spotlight when news came out that last year the chief executives of the top 100 companies enjoyed a pay increase of 7.6%, taking them to an average of 3.2 million pounds ($6.5 million), reported the Times newspaper on Oct. 29.

The 7.6% rise is more than twice the average pay increase of 3.5% for working men and women last year, the article noted. Last year's boost means that average earnings of the top 100 chief executive have doubled over the past five years, according to data cited by the Times.

Choosing correctly

Finding a solution to excessive pay settlements for executives is not an easy matter. Easy formulas or laws don't exist, and much depends on the overall culture and values. Some useful advice came from Benedict XVI, who recently addressed the question of riches, during his homily while visiting the Diocese of Velletri-Segni last Sept. 23.

The Pope reflected on some of the lessons from the parable that speaks of a dishonest steward (cf. Luke 16: 1-13). The tale concludes with the admonition by Jesus: "You cannot serve God and mammon."

"Basically, it is a matter of choosing between selfishness and love, between justice and dishonesty and ultimately, between God and Satan," the Pontiff commented.

In the midday Angelus, back at Castel Gandolfo the same day, Benedict XVI added further reflections on the Gospel text. "Money is not 'dishonest' in itself, but more than anything else it can close man in a blind egocentrism."

Nevertheless, the Pope's words were not a condemnation of money or riches. "Naturally, profit is legitimate and, in just measure, necessary for economic development," he added.

What is needed, he continued, is that the benefits of economic growth be apportioned according to "the logic of sharing and solidarity." Thus, economic activity is not an end in itself and is to be placed for the benefit of all. An evangelical logic with useful lessons for today's business world.

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Keywords

Failure, Flynn, Money, Business, CEO

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