Warning: This isnt an essay. Its a rant. Dont look for deep logic, well-thought-out arguments, or statistically supported statements. Think of this as an amusingly public catharsis from someone whos horrified, outraged, offended, dismayed and (lets be honest) just a wee bit jealous because I havent yet found a way to get rich regardless of whether or not I do a good job.
White collar crime pays. It pays very, very well. Just ask Kenneth Lay, Michael Milken, Ivan Boesky, and a whole host of others. And to top it off, a lot of the horrifically unethical behavior isnt actually illegal. We just trust good people not to do bad things. And our trust gets betrayed. Even when the behavior is illegal, penalties may be large in absolute dollar numbers, but theyre laughably small relative to the crime(1).
We pay salary for adequate performance, except for CEOs
If an engineer in a company suggested, Yes, youre paying me $90,000 salary, but I need an additional 500,000 stock options on top of that to motivate me to finish my project, we would want to fire them just to make a point. The reason we pay them anything is to get their job done. We only pay a bonus if they perform exceptionally well, and even then, we wouldnt pay an engineer a 500,000 share bonus.
Yet we consider it completely reasonable for a CEO to ask for a huge option pool on top of an already over-the-top salary, just as a base part of their job. There are occasional lame justifications We need to give those levels of option to attract a good CEO. Sorry. I just dont buy it. Yes, some percentage of CEOs are really that good. But most arent. Lets have them start working for base salary, and award them options only when they prove theyre worth their already-bloated salary. Warren Buffet manages dozens of businesses, replacing option grants with performance-based bonuses. Maybe the richest investor in the world has insight we should pay attention to?
But with the CEO, lets add an additional stipulation. In a company that can reinvest its free cash in revenue-producing activities, its revenues will rise every year as retained earnings are reinvested, regardless of any actions on the CEOs part.
That mean we can expect share price to rise by roughly the companys ROE every year. So a CEO whose options have a set strike price can do nothing and still collect their obscenely bloated bonus. Fair? I think not.
The CEO should get their base salary for doing their job adequately. They should receive a bonus only if the company does substantially better than expected, and expectations should include the internal equity compounding.
So what is a CEOs job, anyway?
Legally, a CEOs job is making a company successful: crafting strategy, building a senior team, creating a culture, and yes, making money for shareholders. If they dont do all four, they arent meeting the minimum job requirements. If the CEO isnt keeping the company profitable, they arent even earning their salary much less their bonus.
So lets just explore some recent shenanigans of those wacky corporate CEOs. In each case, the defendant was accused of wrong-doing, and their excuse was, Golly shucks, I just didnt know what was happening with my company. Sorry boss. To the best of my knowledge, not a single one offered to return any of the money they received in salary, stock, or bonus which they were awarded for doing a supposedly stellar job:
Kenneth Lay. CEO of Enron. Made hundreds of millions from selling stock while restricting his employees from selling their 401(k)-owned shares while the price plummeted. Claimed his understanding of accounting and complex financial transactions was vague at best.(2) Uh, huh. Is this a man who deserves the rewards associated with being CEO of a $101 billion company? A man who has a vague understanding of his companys main business, which involves over 3,000 financial partnerships?
Jeff Skilling. Founded the trading arm of Enron and served as its COO and CEO. Built the organization from scratch. Did the hiring, set the goals, determined the culture. Had full responsibility for its performance. Was happy to take bonuses and stock worth tens (hundreds?) of millions, essentially claiming responsibility for that performance. When Enron collapsed under the weight of more than 600 off-balance-sheet partnerships, Mr. Skillings defense(3), according to a Feb. 7, 2002 article in Time, was I was not aware… I did not believe… and I did not have any knowledge…
Jeff, babe. Your job was knowing. You built the company and didnt know? Cmon. Youre an ex-McKinsey consultant and a Harvard MBA, and you didnt notice something was a bit odd? Perhaps when your Board of Directors two times voted to suspend your companys ethical guidelines to allow certain deals(4), you might have taken note. As CEO, COO, and founder of the division, perhaps you have heard of the Board of Directors?
Chief C. Gregory Earls, chairman and CEO of U.S. technologies is charged with misappropriating $13.8 million and criminal charges of securities, mail and wire fraud(5). He says It’s ludicrous. I practically have no assets right now.(6) Earls said in a telephone interview. If I stole $15 million, where is it? Well, apparently at least $500,000 of it was happily posted by Earls for a personal-recognizance bond so he doesnt have to wait for his trial in jail. Great use of that bonus money, isnt it?
Earls bypassed the I dont know defense, in favor of the charges are substantially embellished defense. Its a shame he cant say charges have no bearing on reality. A wishy-washy response like that suggests that Mr. Earlss benefits, perks, and job title are perhaps also substantially embellished(7) from where they should be.
Henry C. Yuen, former CEO of Gemstar-TV Guide (and once named Americas Most Successful Asian Executive) was fired after the SEC recommended jail time for his refusal to testify in an investigation into the companys accounting practices. I guess this isnt I didnt know, but rather, I really dont want to help you know. In any event, he may be about to waltz off with a $30 million cash severance(8). That will buy a lot of tvs, and probably a lifetime subscription to tv guide. The $30 million must be his reward for doing such a good job that the SEC wanted to review his books in sheer admiration. And by the way, he stays on the payroll for the time being. Doncha love it? Other peoples employment is linked to the companys ability to pay and the quality of their work. And we wonder why the rank and file are a tad cynical?
My Favorite I Didnt Know
My favorite, Ive saved for last. Just for jollies, lets keep him anonymous for now.
John Doe of XYZ corp received $60mm in cash, stock, etc. when he left his company. The company had loaned him $24 million to buy company stock, and forgave the loan when the stock price dropped. His latest achievement: selling 120,000 shares of stock last August, less than one month before they didnt meet analyst expectations and the stock dropped. He claimed he had no insider knowledge he said. Um, really? As CEO, a mere three weeks before the announcement, he didnt know that his company would miss the projections that he promised Wall Street? Once again, the defense is basically, I did nothing wrong. I was just incompetent.
Well, surprise! John Doe of XYZ, is really John Snow of CSX, the new Treasury Chief of the United States. Im sure he will do just fine at the new job. And if there are any important issues that crop up at the treasury, the rest of us can sleep easy knowing that hell be able to give us three weeks notice(9).
(1) At the Harvard Business School conference on April 22, 2003, Restoring Confidence in American Business, a major SEC player pointed out that Michael Milken paid almost a $1b fine for his 1980s market manipulations. That sounds impressive until you realize he still walked away with more than a billion. Yes, a billion-dollar fine is high, but is it enough, given that the criminal still has enough left to support 5,000 people for life? back to article
(2) Ken Lays Best Defense, Forbes, 2/13/02. back to article
(3) Skilling: The CEO Who Wasnt There, Time Online, 2/7/02. back to article
(4) The Role of the Board of Directors in Enrons Collapse, report by Senator Joe Lieberman, 5/7/2002. back to article
(5) U.S. Technologies Assets Frozen, Washington Post, 3/14/03. back to article
(6) Earls Faces Additional Charges of Defrauding Investors, Washington Post, 3/25/03. back to article
(7) U.S. Technologies CEO Accused of Fraud, by Erin McClam, Associated Press, 3/24/03. back to article
(8) Fired Gemstar exec may get $30M, Reuters CNN Money, 4/23/03. back to article
(9) Public Citizen Seeks Government Records on Treasury Secretary Nominee, Public Citizen web site. 12/12/02. back to article