Think About Sin When Bonuses Are Revealed: Roger Lowenstein
Bonuses to senior executives are shooting up. They’re a good reminder of what Congress forgot when it was reforming the financial system. Excessive pay isn’t a problem just at banks; it’s endemic to the culture of corporate America.
Excessive and ill-conceived pay encourages chief executive officers to overreach and misallocate resources. And to be honest, except in rare deserving cases, eight-figure bonuses make me angry.
Why should one writer’s pique matter? Because one of the biggest threats to American democracy is inequality. When people lose faith in the system, institutions suffer. People stretch to buy homes, or overuse credit to match their neighbors. And when executives earn more in a half day than teachers do in a year, talented people don’t pursue careers in education.
Executive pay shouldn’t be set by government (or by op-ed writers). It should be set by shareholders. But shareholders don’t have a real voice. And the pay system is way out of line with any rational system of incentives that would serve their interest.
In the coming proxy season, you will see executives getting huge raises and justifying it on the basis that their stocks and profits are up. But a CEO’s impact is felt over many years -- not just one. A single up year doesn’t warrant a big bonus if the longer-term performance was mediocre. Nor is simply riding a stock down and then up again cause for celebration. When a batter in baseball slumps to .200, he doesn’t deserve a bonus for getting his average back to .250.
True pay-for-performance doesn’t mean doling out an extravagant sum for matching the market, or awarding a can’t- miss stock option. And the executive who receives stock options year after year is almost certain to get an award, some year, when the stock is at a low, guaranteeing a profit.
Most of all, in a rational pay system, executives who stand to make large returns would run the risk of personal loss. That that doesn’t mean cutting pay in some categories while compensating with raises in others.
In recent months, one of the most abusive pay packages was that of Larry Ellison, CEO and founder of Oracle Corp. (ORCL), the world’s second-largest software maker. Ellison is a perennial league leader in excessive pay, though he draws little notice because Oracle’s compensation is announced off-season, in September.
Last year, Ellison reduced his salary to $1. How magnanimous. He also got a whopping $62 million in stock options, in addition to $6.5 million in “non-equity incentive.”
Why a multibillionaire needed the motivation of stock options or an “incentive” plan is a question for Ellison’s psychiatrist. You would think his 1.1 billion shares -- a 22 percent stake -- was motivation enough. In each of the previous two years, he was paid $85 million.
I doubt that any performance would truly justify Ellison’s take; Oracle’s didn’t come close. Over the 10 years through Dec. 31, Oracle stock is up less than 1 percent a year.
The current proxy season is young, but a worthy challenger to Ellison is Philippe Dauman of Viacom Inc. (VIA) Dauman had a great mentor in company founder Sumner Redstone. No longer CEO, but still paid like one, Redstone pocketed $15 million in 2010.
But the real stash went to Dauman. The proxy justifies Dauman’s pay, noting he “did not receive a salary or target bonus increase in 2009 due to a compensation freeze in light of economic conditions.” This sounds like he was on hardship pay. Actually, in each of the preceding three years, Dauman was paid more than $25 million.
So in 2010, the board figured, he was ready for big-time. Dauman got a salary of $2.6 million and an annual stock award of $10 million. In addition, he got a one-time stock award of $31 million. Was there some vital distinction that created a pressing need for both awards? The proxy says the annual award is “designed to motivate employees to focus on long-term growth and stockholder value.” And the rationale for the one-time award? As the proxy says, “See ‘Annual Equity Awards’ above.”
Dauman also got $6 million in stock options and -- you guessed it -- $22 million in one-time options. Plus $11 million in a “non-equity incentive.” Viacom says each pay category was based on performance metrics; apparently, Dauman didn’t always qualify for the full award. Shareholders should thank their stars.
The compensation, of course, was blessed by a consultant, Pay Governance. But no metrics can justify such plunder. Since Viacom’s stock began trading in its current form, in 2005, through year-end 2010, the shares are up just over 1 percent a year.
Viacom and Oracle are cases of pathological greed, but the essential sin of grabbing and then grabbing more -- without any downside -- is commonplace. So is the fig leaf of hiring consultants, each of whom lowers the bar for the next.
Watch this spring, as proxy disclosures (and bonuses, and options, and “one-time” bonuses) roll. While shareholders are still trying to earn back their losses, the brass will be accumulating new fortunes. Congress thought it was taking a bold step by instituting so-called say-on-pay for shareholders. But these non-binding votes are merely show. Shareholders should be able to vote, aye or nay on pay -- and have it count.
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