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CEOs of the World, Unite?
When Executive Pay
Can Be Truly Excessive
April 26, 2006; Page A2

There's something perverse about chief executives who defend their paychecks with surveys of their peers. By doing this, the world's pre-eminent capitalists revert to a form of CEO socialism: From each according to his ability; to each according to Towers Perrin.

If there is a defense for paying a CEO five hundred times as much as the average worker, it can't be found in surveys by pay consultants. It has to be rooted in clear demonstrations of market value. That's why, in last week's column¹, I defended the nine-figure take-home of former Exxon Mobil CEO Lee Raymond. Critics may be offended by the sheer size of that payout. But shareholders can't be too upset with the results. And it's shareholders who foot the bill.

Trouble is, for every Lee Raymond, there is a Hank McKinnell. Mr. McKinnell is chief executive of the drug giant Pfizer Inc. Over the past five years, the company's shareholders have seen the value of their shares fall by 40% -- a steeper drop than seen, on average, by shareholders of other companies in the industry. Yet the Pfizer chief still made $79 million in pay over that period, and has a guaranteed pension of $6 million a year for life. (Stanley Ikenberry, the lead director on Pfizer's board, says Mr. McKinnell deserves the pay for "guiding Pfizer through an incredibly challenging time" and "sustaining the investment in R&D necessary to provide long-term shareholder benefit.")

Mr. McKinnell owes his current prominence in the pay debate to Frederick "Shad" Rowe, a Dallas investor who has teamed up with oil man Boone Pickens and mutual-fund pioneer John Bogle, among others, to form a new group called the Investors for Director Accountability Foundation.

TALKING BUSINESS

Email me at business@wsj.com² and read reader comments Saturday at WSJ.com/TalkingBusiness³.

Unlike the usual CEO pay posse -- populated by unionists, nuns, environmentalists and assorted others -- Mr. Rowe's group is strictly business. "We don't sell our stocks because a company damages a tree in Bolivia," he says. "We prize the driven, egocentric maniacal CEO who builds value. But we want our directors to preserve that value for shareholders."

The group picked Mr. McKinnell as its first target, but he hardly stands alone in the pay-for-nonperformance Hall of Shame. Mr. Rowe started with a list of about 14 candidates that included Verizon Communications Inc.'s Ivan Seidenberg, AT&T Inc.'s Edward Whitacre and Home Depot Inc.'s Robert Nardelli.

Each of those men presides over a company that has seen total returns to shareholders fall sharply in the past five years. And according to the Corporate Library, each has underperformed relative to others in its industry. Yet the CEOs have received total compensation over the past two years ranging from Mr. Seidenberg's $27 million to Mr. Nardelli's $50 million. (Verizon officials insist that by their measures, the company has performed slightly better than its peers over the past five years.)

The kind of strange logic that justifies this largess can be found in a paragraph in AT&T's proxy materials describing the company's long-term incentive plan. For the 2002-2004 performance period, the proxy materials report that Mr. Whitacre and company had "substantially met all the performance goals set" by the compensation committee. In a nod to the fact that the company's stock had fallen to 67% of its previous value in the interim, the incentive payout "was reduced to 67% of the target amount."

In short, shareholders lost 33% of their investment, while Mr. Whitacre got 67% of his performance-based pay. Sound right to you? And that's on top of a salary that totaled $2.1 million last year, plus a bonus of $7.1 million. (Selim Bingol, an AT&T spokesman, points out that shareholders also got regular dividends, and he credits Mr. Whitacre with leading the company "through an extremely difficult time." He cites yesterday's favorable earnings report as an indication that AT&T "is now in the best position of any of our peers.")

Mr. Whitacre and his colleagues certainly deserve to be compensated for their time and effort. But it is very hard to justify an eight-figure salary with a time clock. It can only be justified by market success.

Defenders of the current system say CEO pay is set by market forces. But I am skeptical. Who else out there is eager to pay Messrs. McKinnell, Seidenberg, Whitacre and Nardelli upward of $10 million a year for lackluster performance? I'm reminded of the New York Stock Exchange directors who justified increasing Dick Grasso's pay package -- which enabled him to amass $200 million, a good portion of it during his eight-year reign as CEO -- by citing fears he might leave to become secretary of the Treasury, a job that pays $175,700 a year.

That kind of logic is only used by those spending other people's money. And that's why shareholders deserve a greater say.