Why do bad CEO's get pay raises? - The Orange Mane

alkemical · 01-23-2007, 12:29 PM

THE SKY-HIGH CLUB

Even the most jaded observer of American corporate culture had to blink when, earlier this month, Home Depot’s board of directors handed the company’s C.E.O., Bob Nardelli, more than two hundred million dollars after pushing him out of his job. Nardelli had not delivered for shareholders: Home Depot’s stock price went down about six per cent during his tenure. And, while his operating performance was actually quite good, he would have made a lot of money even if it hadn’t been: most of his contract was guaranteed, and, when he had a hard time meeting a particular target for his bonus, the board generously substituted an easier one.

The size of Nardelli’s severance was startling, but his “heads I win, tails you lose” arrangement is far from unusual in corporate America these days. For all the talk of restraining C.E.O. pay, most compensation committees remain what Warren Buffett once called them—“tail-wagging puppy dogs.” At some companies, this is simply because the C.E.O. has packed the board with cronies. But at Home Depot Nardelli did not pick the board members, and most of them were what are usually called independent directors—ones who don’t work for the company or do any business with it. Even when an independent board negotiates a C.E.O.’s contract, however, the directors are often, in a sense, negotiating with themselves. Of the ten independent members of Home Depot’s board, for instance, eight are or have been C.E.O.s. Since C.E.O. pay is often driven by comparisons between companies, directors have a certain interest in keeping executive pay high. Furthermore, the salaries keep escalating because, board members argue, there just aren’t enough good C.E.O. candidates out there. There’s no evidence that this is actually the case, but who is more likely to feel that good C.E.O.s are indispensable and rare than other C.E.O.s?

A more complex problem lies in the nature of the social networks that bind directors and executives together. Home Depot has an exceptionally well-connected board. On average, its directors sit on two other outside boards, and the compensation-committee chairman sits on four. Connections are often beneficial—they insure that people are well informed, creating opportunities for new business. Unfortunately, the more connected board members are, the likelier they are to overpay for executive talent. In some cases, which economists call “interlocking” directorates, this is straightforward: I sit on your board and you sit on mine, and we both have an incentive to be generous. Sure enough, several studies have found that companies with interlocking directors pay C.E.O.s significantly more. Surprisingly, though, connectedness remains important even when the links are not direct. A study of S. & P. 500 companies, by Amir Barnea and Ilan Guedj, finance professors at the University of Texas, found that, even after other factors were accounted for, C.E.O.s at companies whose directors sat on a number of other boards were paid thirteen per cent more than C.E.O.s at companies whose directors were not.

Why? One reason is that the more connections board members have, the more likely they are to end up with what you could call “friend of a friend” links to the company’s C.E.O. A recent study by a team of business-school professors mapped the social networks of twenty-two thousand directors at more than three thousand companies, charting the degrees of separation between directors and C.E.O.s, and found that at companies where there are what the study’s authors termed “short, friendly” links between directors and executives C.E.O.s are paid significantly more. But even in the absence of this kind of explicit back-scratching the tight connections between board members insure that, once an idea takes hold at a few companies, it’s easier for it to spread, in a viral fashion. A host of studies have found that network ties affect how likely companies are to adopt anti-takeover strategies, to embark on specific types of acquisitions, and even to change their organizational structures. The same effect is observable in the matter of C.E.O. pay: Barnea and Guedj found that board members at companies where C.E.O. pay was high were more likely to support high pay when they sat on other companies’ boards as well. And, as with any virus, some people are more potent transmitters: Kenneth Langone, the board member who engineered Nardelli’s hiring at Home Depot, was also the head of the compensation committee that approved Dick Grasso’s extravagant payday at the New York Stock Exchange, and was on the G.E. board’s compensation committee that approved Jack Welch’s luxurious retirement package. Langone is what an epidemiologist might call a supercarrier of the executive-pay virus.

It’s tempting to wonder if the sheer prevalence of enormous C.E.O. compensation packages means that they have some beneficial effect. But academics have found little evidence that higher executive pay leads to better company performance, and the recent study of three thousand companies actually found that the firms whose directors were the most well connected—and which paid their C.E.O.s most lavishly—in fact underperformed the market. Markets work best when people make independent decisions about how much a commodity—in this case, the C.E.O.—is worth. They stop working well when people simply imitate what others are doing, or when non-market factors (like how well you get along with the boss) intrude. In the end, the very things that make people likely to join a board—connections, business experience, sociability—are also the things that make them less effective once they do.

— James Surowiecki

defenseman · 01-23-2007, 12:43 PM

Because, corporate america has lost it's ability to properly measure the ability of someone to their job. It's no different than the teachers unions. Bad teachers get great deals. Sick if you ask me...dman

*All us schmucks pay the price for their stupidity

Bronco_Beerslug · 01-23-2007, 01:50 PM

Quote:

Originally Posted by defenseman

Because, corporate america has lost it's ability to properly measure the ability of someone to their job. It's no different than the teachers unions. Bad teachers get great deals. Sick if you ask me...dman

*All us schmucks pay the price for their stupidity

How do you pay for a CEO's "stupidity"? And just how can you compare the teacher's union to CEO's?

Dudeskey · 01-23-2007, 01:57 PM

Yeah I heard about that Home Depot exec's golden parachute, talk about rewarding failure... I beleive there was some exec (Patricia Dunn?) from HP that was let go after the surveilance case became public that was given a large sum on the way out too... sickening.

defenseman · 01-23-2007, 02:09 PM

Quote:

Originally Posted by Bronco_Beerslug

How do you pay for a CEO's "stupidity"? And just how can you compare the teacher's union to CEO's?

Who pays for financial mistakes? Eventually, the consumer. Bad teachers, Unions? While the teachers unions have some good teachers, there are just as many very bad ones milking the system for a pension. the "union" needs to weed out the nonperformers and make part of not only becoming a member, but maintaining membership in said union, evaluation based. Evaluated for being a successful teacher, evaluated for doing ones job. Too many don't do it today, our kids pay the price, all for someone in it not to teach, but for a pension...dman

*JMHO

defenseman · 01-23-2007, 02:11 PM

Quote:

Originally Posted by Urinal_Cake

Yeah I heard about that Home Depot exec's golden parachute, talk about rewarding failure... I beleive there was some exec (Patricia Dunn?) from HP that was let go after the surveilance case became public that was given a large sum on the way out too... sickening.

that was sick. the PI in that case was from littleton, CO. Don't know how much time he'll get but he is up on charges. And they PAID HER to leave. That is a freaking joke...dman

Bronco_Beerslug · 01-23-2007, 02:11 PM

Quote:

Originally Posted by defenseman

Who pays for financial mistakes? Eventually, the consumer. Bad teachers, Unions? While the teachers unions have some good teachers, there are just as many very bad ones milking the system for a pension. the "union" needs to weed out the nonperformers and make part of not only becoming a member, but maintaining membership in said union, evaluation based. Evaluated for being a successful teacher, evaluated for doing ones job. Too many don't do it today, our kids pay the price, all for someone in it not to teach, but for a pension...dman

*JMHO

CEO's are elected by the E boards who are elected by shareholders. What financial mistakes are you taking about?

W*GS · 01-23-2007, 02:25 PM

Interestingly, the latest issue of The Economist (20 Jan issue) has a series of articles on executive pay. I recommend reading it.

As usual, the typical op/ed ranting simplifies the issue too much.

alkemical · 01-23-2007, 02:39 PM

Interestingly, i wouldn't be suprised a pro-private industry magazine - such as "The Economist" - would have a different POV than say... the new yorker?

It wouldn't be that The Economist would have it's own agenda to sell to it's subscription base as, would they? I mean, that'd be a capitalistic idea!

W*GS · 01-23-2007, 03:03 PM

Quote:

Originally Posted by claviculasolomonis

Interestingly, i wouldn't be suprised a pro-private industry magazine - such as "The Economist" - would have a different POV than say... the new yorker?

There's a POV supported by facts, and then there's just a POV. I'll let you decide which is which.

alkemical · 01-23-2007, 03:13 PM

Quote:

Originally Posted by W*GS

There's a POV supported by facts, and then there's just a POV. I'll let you decide which is which.

wagsy - are you telling me that all of the information in this article above is incorrect?

If so, isn't that over simplfying a tad?

You wish to reley on authority from pretty much one source. I can't take your word for it, since you are biased to your one and only source. You've shown repeatedly that is your method of operation.

Sorry bud, but just "because" - doesn't work for me. (not only that, but now unobjective you are to your own bias, shows a short sighted approach to "facts". Since of course, "facts" are only "facts" when they come from your approved authority).

W*GS · 01-23-2007, 03:26 PM

Someone wee into your oatmeal today?

alkemical · 01-23-2007, 03:38 PM

Quote:

Originally Posted by W*GS

Someone wee into your oatmeal today?

Just pointing out the flawed logic in how you construct an argument. But other than that - I also noticed you didn't really address anything.

Ce la vie

W*GS · 01-23-2007, 04:01 PM

I merely pointed out a good reference; the cases of CEOs getting amazing pay for lackluster or very poor performance are addressed - as well as the reasons why.

Launching into a snippy tirade may make you feel better. That's OK.

alkemical · 01-23-2007, 04:03 PM

Quote:

Originally Posted by W*GS

I merely pointed out a good reference; the cases of CEOs getting amazing pay for lackluster or very poor performance are addressed - as well as the reasons why.

Launching into a snippy tirade may make you feel better. That's OK.

It does, and i'm fine with that. Just like i'm fine on calling someone's bull**** now and then.

But if you want to be serious Wags:

What would be another POV on why ****ty CEO's get raises?

W*GS · 01-23-2007, 05:00 PM

Quote:

Originally Posted by claviculasolomonis

What would be another POV on why ****ty CEO's get raises?

Simply resist envy.

alkemical · 01-23-2007, 05:14 PM

Quote:

Originally Posted by W*GS

Simply resist envy.

Me thinks you are more of a pro-private enterprise guy than an actual free market guy.

W*GS · 01-23-2007, 05:21 PM

Quote:

Originally Posted by claviculasolomonis

Me thinks you are more of a pro-private enterprise guy than an actual free market guy.

Differentiate between "private enterprise" and "actual free market".

alkemical · 01-23-2007, 05:23 PM

Quote:

Originally Posted by W*GS

Differentiate between "private enterprise" and "actual free market".

I have, that's why I'm wondering if you are private enterprise protaganist - hiding under the guise of free market theology - as I am an anarchist hiding under the libertarian idelogy.

W*GS · 01-23-2007, 05:30 PM

Quote:

Originally Posted by claviculasolomonis

I have,

I musta missed it.

Quote:

Originally Posted by claviculasolomonis

that's why I'm wondering if you are private enterprise protaganist - hiding under the guise of free market theology - as I am an anarchist hiding under the libertarian idelogy.

Whatever.

alkemical · 01-23-2007, 05:33 PM

So why do ****ty CEO's get a pay raise Wags.

You still haven't answered it.

W*GS · 01-23-2007, 05:47 PM

They get pay raises because they're not anarchists - or because it pisses you off.

Crushaholic · 01-23-2007, 05:55 PM

We need to halt Congress pay raises before we examine CEO pay raises...

alkemical · 01-23-2007, 06:01 PM

Quote:

Originally Posted by W*GS

They get pay raises because they're not anarchists - or because it pisses you off.

Actually not really wags. (Since i think Steve Jobs has done a wonderful job with the branding and movement of apple, and MS's move to smart devices) - I specifically asked about ****ty CEO's - like the guy in the article -

The envy game isn't what i play - nice try to divert it though! Since i asked a bonafide question, the only retort you have is a simple back handed insult to the story - and nothing more.

So either put up, and explain why incompetent CEO's are being rewarded - since such behaviour would be a negative for investors. (Or should be anyway, if they have any common sense of it).

Now, if you have nothing more to add, other than a straw-man argument, or some bush-league ploy to divert the topic elsewhere - i'd kindly ask you to move along, or STFU.

alkemical · 01-23-2007, 06:03 PM

Quote:

Originally Posted by Crushaholic

We need to halt Congress pay raises before we examine CEO pay raises...

This i agree with.

01-23-2007, 12:29 PM	#1
alkemical Guerrilla Ontologist rorrim\|mirror Join Date: Apr 2001 Location: Future Posts: 42,696 Adopt-a-Bronco: Prima Materia	Why do bad CEO's get pay raises? THE SKY-HIGH CLUB Even the most jaded observer of American corporate culture had to blink when, earlier this month, Home Depot’s board of directors handed the company’s C.E.O., Bob Nardelli, more than two hundred million dollars after pushing him out of his job. Nardelli had not delivered for shareholders: Home Depot’s stock price went down about six per cent during his tenure. And, while his operating performance was actually quite good, he would have made a lot of money even if it hadn’t been: most of his contract was guaranteed, and, when he had a hard time meeting a particular target for his bonus, the board generously substituted an easier one. The size of Nardelli’s severance was startling, but his “heads I win, tails you lose” arrangement is far from unusual in corporate America these days. For all the talk of restraining C.E.O. pay, most compensation committees remain what Warren Buffett once called them—“tail-wagging puppy dogs.” At some companies, this is simply because the C.E.O. has packed the board with cronies. But at Home Depot Nardelli did not pick the board members, and most of them were what are usually called independent directors—ones who don’t work for the company or do any business with it. Even when an independent board negotiates a C.E.O.’s contract, however, the directors are often, in a sense, negotiating with themselves. Of the ten independent members of Home Depot’s board, for instance, eight are or have been C.E.O.s. Since C.E.O. pay is often driven by comparisons between companies, directors have a certain interest in keeping executive pay high. Furthermore, the salaries keep escalating because, board members argue, there just aren’t enough good C.E.O. candidates out there. There’s no evidence that this is actually the case, but who is more likely to feel that good C.E.O.s are indispensable and rare than other C.E.O.s? A more complex problem lies in the nature of the social networks that bind directors and executives together. Home Depot has an exceptionally well-connected board. On average, its directors sit on two other outside boards, and the compensation-committee chairman sits on four. Connections are often beneficial—they insure that people are well informed, creating opportunities for new business. Unfortunately, the more connected board members are, the likelier they are to overpay for executive talent. In some cases, which economists call “interlocking” directorates, this is straightforward: I sit on your board and you sit on mine, and we both have an incentive to be generous. Sure enough, several studies have found that companies with interlocking directors pay C.E.O.s significantly more. Surprisingly, though, connectedness remains important even when the links are not direct. A study of S. & P. 500 companies, by Amir Barnea and Ilan Guedj, finance professors at the University of Texas, found that, even after other factors were accounted for, C.E.O.s at companies whose directors sat on a number of other boards were paid thirteen per cent more than C.E.O.s at companies whose directors were not. Why? One reason is that the more connections board members have, the more likely they are to end up with what you could call “friend of a friend” links to the company’s C.E.O. A recent study by a team of business-school professors mapped the social networks of twenty-two thousand directors at more than three thousand companies, charting the degrees of separation between directors and C.E.O.s, and found that at companies where there are what the study’s authors termed “short, friendly” links between directors and executives C.E.O.s are paid significantly more. But even in the absence of this kind of explicit back-scratching the tight connections between board members insure that, once an idea takes hold at a few companies, it’s easier for it to spread, in a viral fashion. A host of studies have found that network ties affect how likely companies are to adopt anti-takeover strategies, to embark on specific types of acquisitions, and even to change their organizational structures. The same effect is observable in the matter of C.E.O. pay: Barnea and Guedj found that board members at companies where C.E.O. pay was high were more likely to support high pay when they sat on other companies’ boards as well. And, as with any virus, some people are more potent transmitters: Kenneth Langone, the board member who engineered Nardelli’s hiring at Home Depot, was also the head of the compensation committee that approved Dick Grasso’s extravagant payday at the New York Stock Exchange, and was on the G.E. board’s compensation committee that approved Jack Welch’s luxurious retirement package. Langone is what an epidemiologist might call a supercarrier of the executive-pay virus. It’s tempting to wonder if the sheer prevalence of enormous C.E.O. compensation packages means that they have some beneficial effect. But academics have found little evidence that higher executive pay leads to better company performance, and the recent study of three thousand companies actually found that the firms whose directors were the most well connected—and which paid their C.E.O.s most lavishly—in fact underperformed the market. Markets work best when people make independent decisions about how much a commodity—in this case, the C.E.O.—is worth. They stop working well when people simply imitate what others are doing, or when non-market factors (like how well you get along with the boss) intrude. In the end, the very things that make people likely to join a board—connections, business experience, sociability—are also the things that make them less effective once they do. — James Surowiecki

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01-23-2007, 12:43 PM	#2
defenseman Ring of Famer 2007 record pred. (7-9) Join Date: Apr 2001 Posts: 9,232	Because, corporate america has lost it's ability to properly measure the ability of someone to their job. It's no different than the teachers unions. Bad teachers get great deals. Sick if you ask me...dman *All us schmucks pay the price for their stupidity

01-23-2007, 01:57 PM	#4
Dudeskey Ring of Famer This space for rent Join Date: Jun 2005 Location: Colorado Springs, CO Posts: 4,314	Yeah I heard about that Home Depot exec's golden parachute, talk about rewarding failure... I beleive there was some exec (Patricia Dunn?) from HP that was let go after the surveilance case became public that was given a large sum on the way out too... sickening.

01-23-2007, 02:25 PM	#8
W*GS Ring of Famer Join Date: Jan 2004 Location: Earth Posts: 19,511	Interestingly, the latest issue of The Economist (20 Jan issue) has a series of articles on executive pay. I recommend reading it. As usual, the typical op/ed ranting simplifies the issue too much.

01-23-2007, 02:39 PM	#9
alkemical Guerrilla Ontologist rorrim\|mirror Join Date: Apr 2001 Location: Future Posts: 42,696 Adopt-a-Bronco: Prima Materia	Interestingly, i wouldn't be suprised a pro-private industry magazine - such as "The Economist" - would have a different POV than say... the new yorker? It wouldn't be that The Economist would have it's own agenda to sell to it's subscription base as, would they? I mean, that'd be a capitalistic idea!

01-23-2007, 03:26 PM	#12
W*GS Ring of Famer Join Date: Jan 2004 Location: Earth Posts: 19,511	Someone wee into your oatmeal today?

01-23-2007, 04:01 PM	#14
W*GS Ring of Famer Join Date: Jan 2004 Location: Earth Posts: 19,511	I merely pointed out a good reference; the cases of CEOs getting amazing pay for lackluster or very poor performance are addressed - as well as the reasons why. Launching into a snippy tirade may make you feel better. That's OK.

01-23-2007, 05:33 PM	#21
alkemical Guerrilla Ontologist rorrim\|mirror Join Date: Apr 2001 Location: Future Posts: 42,696 Adopt-a-Bronco: Prima Materia	So why do ****ty CEO's get a pay raise Wags. You still haven't answered it.

01-23-2007, 05:47 PM	#22
W*GS Ring of Famer Join Date: Jan 2004 Location: Earth Posts: 19,511	They get pay raises because they're not anarchists - or because it pisses you off.

01-23-2007, 05:55 PM	#23
Crushaholic Armchair Poster Join Date: Dec 2003 Location: Topeka, KS Posts: 22,044	We need to halt Congress pay raises before we examine CEO pay raises...