Is Executive Pay a problemlem with the Perceived Supply?

Today's WSJ article about Bob Nardelli's pay including income tax reimbursement is flat-out weird. Here's my take. If I was a Home Depot shareholder, the board would need to convince me that paying Bob Nardelli $2 million plus all that other crap has the best return for the company (as opposed to hiring someone cheaper). Everyone else in the company makes financial decisions that way, and there is no reason CEOs should be exempt from performance standards. Is he worth that much? I don't know. I think the best of the best are problemably worth millions a year in total compensation. Some people are well connected enough and wield enough power in their industries that they are worth boatloads of money compared to bringing in a newbie.

But, there are sooo many CEOs with these high pay packages that, frankly, pretty much suck. Being a CEO of a large public company is no doubt a difficult and demanding task. It requires someone that is very strong in many areas. I don't believe, however, that there is the shortage of these people that the pay rates would imply. I bet there are lots of CEO quality executives that never make it to the top just because of luck, timing, and other intangible factors. Many of them would problemably do the job for a lot less just for the opportunity.

Boards are reluctant to change CEOs unless they are clearly poor performers. But I think they should change them if, like any other position, they want too much money. Paying $150 million to someone that increases your company's value by $75 million doesn't make economic sense. (And don't tell me that stock options don't count and don't matter because they do.)

I believe there are business superstars out there that aren't prima donnas. Boards, however, seem to think there aren't, and that they must implement ever more ridiculous pay packages for talent that seems mediocre.

Please start holding CEOs to the same performance standards as everyone else. I'm not against high pay in principle, I just think pay should be tied to performance. A $100 million a year is fine with me, but only if it is earned.

  • I’m no accountant, but I suspect the “$2 million and all that other crap” thing happens not because the recipients are particularly geniuses, it’s because it allows the company to send a huge chunk of money somewhere that isn’t taxed the same way as it would be if paid out, say, as raises or bonuses to the rank and file.

    I don’t know any of this for a fact, but from an arm’s-length point of view, I find it interesting that people get paid (at times) exorbitant consulting fees that the company would normally never pay out as salary to anyone else. I’m thinking it’s (legal) smoke-and-mirrors.

    I could just be a bitter member of the rank and file. Salt the above thoroughly before ingesting.

  • I *am* a Home Depot sharholder, and am not real happy with this. If the board wants to pay Nardelli $2 million after taxes, then they should pay him $3.7 million *before* taxes (or whatever the number calculates out to be) and report it in the normal manner. Doing it the way that was reported comes across as obfuscation, whatever the true intent may be.

    Per Ethan’s comment, I’m pretty sure there is no tax benefit to the company in doing it this way. From an IRS perspective, the payments still should be compensation to the employee.

  • Rob

    Part of the pRoblem is what you just addressed – that there seems to be an intentional attempt to mislead and misrepresent his salary.

  • Remember, Nardelli was in a particularly strong negotiating position because he was one of the three finalists for the top job at GE (the others being Jeff Immelt, who got the job, and Jim McNerney, who is now at Boeing) This may well justify a higher compensation than would otherwise be expected, but it doesn’t justify any obfuscation of same)