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Rewarding Failure

11/13/2007 - 07:52 PST

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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 ...

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