Public Company CEOs Overpaid Stronger Shareholder Rights the Only Solution

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1 Public Company CEOs Overpaid Stronger Shareholder Rights the Only Solution BDO Dunwoody Weekly CEO/Business Leader Poll By COMPAS in Canadian Business For Publication January 10, 2008 COMPAS Inc. Public Opinion and Customer Research January 10, 2008

2 1.0. Introduction The Canadian Centre for Policy Alternatives announced recently that the 100 highest paid public company CEOs earned as much in their first day and a quarter as the average wage-earner, about $ 39,000. The CEOs annual pay is about 8.5 million dollars. That was the setting for a survey among CEOs and business leaders on the COMPAS panel. Panelists do believe that public company CEOs are overpaid but they tend to see this as a corporate more than societal problem. To the extent that a cure is possible, it lies in greater legal rights for shareholders, they say. There exists some sympathy on the panel for the view that income differences as great as those portrayed by the Canadian Centre for Policy Alternatives are wrong. Alongside this perspective is some belief that some high income earners deserve their benefits and some concern that the cure [for income inequality] is often worse than the disease Societal Inequality Beware the Cure Panelists are divided about the dangers of income inequality. On the one hand, there is some sympathy for the Canadian Centre for Policy Alternatives view that the extreme incomes received by the top 100 CEOs are wrong and improper, as shown in table 2. Yet, some high income earners do make contributions that justify such compensation, say panelists. In any case, 2

3 Table 2: (Q1) Thinking of personal income issues in general and the issue of inequality, on a 7 point agreement scale where 7 means strongly agree and 1 strongly disagree, how much do you agree that... It is wrong to see inequality as fixable because the cure is often worse than the disease It is wrong to see inequality as a problem because high income earners can bring immense economic growth to their companies and communities It is wrong when income differences as great as this occur Mean DNK Corporate Matters Panelists are concerned about public CEO pay packages. Sizeable numbers perceive them as overpaid or perceive some as much overpaid and others much underpaid, as shown in table 3a. Among those who strongly disagree that public company CEOs are overpaid, most nonetheless see patterns of unfairness in compensation, i.e. that some are overpaid, others underpaid. 3

4 Respondents who did not fully 1 reject that idea that public company CEOs are overpaid or that some are much overpaid while others much underpaid were asked what should done. The two predominant views are that shareholder rights should be enhanced or that solutions can only be achieved on a case by case basis, as shown in table 3b. Table 3a: (Q2) Thinking of CEO compensation among the top paying 100 companies and CEOs contributions to the value of their firm, on a 7 point agreement scale where 7 means strongly agree and 1 strongly disagree, how much do you agree that these top paid CEOs are... [RANDOMIZE] Mean DNK Generally overpaid Paid fairly on average but some are much overpaid and others much underpaid Generally paid fairly Generally underpaid Scores >1. 4

5 Table 3b: (Q3) On a 7 point agreement scale where 7 means strongly agree and 1 strongly disagree, how much do you agree that wrong or excessive payment to public company CEOs is a problem that [RANDOMIZE] [Question asked of respondents who scored >1, i.e. did not completely disagree, that CEOs are overpaid or Should be addressed by stronger legal protection for the right of shareholders (N=111) Can never truly be solved except perhaps on a case by case basis (N=111) Should be addressed by imposing higher tax rates on top income earners (N=111) Mean DNK The following verbatims provided a nuanced sense of panelists perspectives: CEO compensation only becomes an issue when CEO's do not provide acceptable value to the shareholders. I don't remember anybody questioning Jack Welch's compensation. Inappropriate CEO selection and compensation are a result of dysfunctional Boards of Directors. To solve the problem and protect shareholders, these areas must be examined further. CEOs are paid highly because they essentially set their own salaries, and this has created a feeding frenzy where the salaries of top executives are outlandish. And the salaries come directly out of the shareholder's pockets. 5

6 Compensation should be managed by the Board and strongly based on performance. Bonuses, which are part of the package, should be tied to improvements, not just a standard payout. The problem with options is also when strike values are manipulated. I see nothing wrong with large option grants with realistic pricing as that places the executive on a level playing field with potential shareholders. It also drives effort to the benefit of all shareholders. Even if a person never slept, it is unreasonable to pay in more than two or three million dollars for one person where in many public companies, they really cannot have an impact on the operations directly as they are too far removed from the day-to-day action. Share holders should have total control of salaries in all public and private companies. All salaries should be moderate. Many companies are hiding behind their own inefficiency by over paying their CEOs. Having a superstar on a sports team can make a big difference and we pay them large salaries because of the value they bring to the team. In the same way, the right leadership at the helm of a company can make a huge difference to its value. The bottom line is that as long as the fans and the shareholders are happy, sports stars and top CEOs are going to be able to command big salaries. High CEO compensation is right when market driven, but wrong when excessive because of unnecessary "extras". What those are is a judgment call. Should a CEO make millions by acquiring another company? Probably not because the motivation for the acquisition is obfuscated. I feel that top executives income and bonuses should be tied to company earnings. Sometimes I feel they are paid on the basis of their incoming negotiating skills. 6

7 I cannot understand why Canadians think there is something wrong with being successful and earning a lot of money. Nortel - Do you want a list? Over paid, under performed, and walked away with a lot of money. Of far greater concern are the salaries of hockey & football sports professionals. A pioneer of a new process of huge importance to humanity or a new engineering export achievement receives little reward unless the inventor converts to an aggressive business pioneer like Bill Gates, for example. Rewards are unrelated to public good, which is unfortunate. Reward extremes are increasing, and this is destabilizing as it can lead to public unrest and political destabilization. Japan realized this and acted on it effectively. Paying CEOs massive amounts of money in no way directly results in increased company performance. Shareholders should be smarter than to believe that it is one man (or woman) at the helm that makes or breaks a company. Speaking as a CEO of a relatively smaller organization, I must say that CEOs of larger companies, like movie and sports celebrities, do seem to be grossly overpaid for what they contribute to society and their companies. However, like these people, there is likely little that could be, or perhaps even should be done, as the "cure will likely be worse than the disease. Although, greater protection for shareholders is a must. Tax thresholds need to be reviewed, $150,000 is not top tax rate salary level, $1million should be the top tax rate salary level. The biggest problem is payment of substantial incomes to under performing CEO. Compensation should be based on 7

8 the size of the corporation rather than face the need to address underperformance which finally adds insult to injury to shareholders when the problem is solved by a large separation bonus. The primary issue with CEO compensation is the disconnect between performance and pay. Boards of Directors are often ineffective at ensuing pay for performance. The situation becomes most concerning when departing CEOs, who grossly underperformed or significantly eroded shareholder value, receive unjustifiable severance. There is a lack of accountability by CEOs/directors to their shareholders, exacerbated by the leniency of the Canadian judicial system. The strength of a company, private or public is not the result of one individual, but rather, the result of the concerted effort of most of its employees. Many CEO's 'success' is the result of a committed employee infrastructure that supports them. The fact is, many CEOs are significantly overpaid relative to what they truly bring-to-the-table. While there is no question that some CEOs bring value to their organizations with their vision and leadership, more often than not there is a disconnect with their compensation. Ideally, a greater proportion of their compensation should be tied to the performance of their company. The difficulty in a free market is that companies will compete for the best by putting together the most attractive packages that they can to attract the best candidates. 8

9 3.0. Methodology The COMPAS web-survey of CEOs and leaders of small, medium, and large corporations was conducted January 3-7, Respondents constitute an essentially hand-picked panel with a higher numerical representation of small and medium-sized firms. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than comparably sized general public studies. In studies of the general public, surveys of 127 are deemed accurate to within approximately 8.7 percentage points 19 times out of 20. The principal and co-investigator on this study are Conrad Winn, Ph.D. and Tamara Gottlieb. 9