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4/18/2012
04:17 PM
Rob Preston
Rob Preston
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Do IT Execs Make Too Much Money?

A Citigroup shareholder vote puts compensation back into the spotlight. Don't run with the "inequality" crowd.

The contentious issue of executive compensation is back in the news following the vote Tuesday by Citigroup shareholders to oppose the pay packages for its CEO and other top execs. The class warriors at The New York Times seized on the opportunity to editorialize in their news pages about national "income inequality" and "outsized compensation," suggesting that "anger over pay for chief executives has spread from Occupy Wall Street to wealthy institutional investors."

It's highly doubtful that those institutional investors, wealthy or otherwise, are now carrying the mantel of the OWS crowd. But clearly there's a movement afoot to hold executives more accountable and tie their pay more closely to performance. Last year, for instance, Hewlett-Packard shareholders for the first time voted to reject the compensation packages of top company executives, including CEO Leo Apotheker, who was forced to resign later in the year as HP struggled to define its strategy, excite its customers, and boost its profits. In May 2010, Motorola became the first U.S. company to fail to earn majority shareholder support for its proposed executive compensation plan.

Such "say on pay" votes, stipulated by the two-year-old Dodd-Frank financial regulations, are non-binding--but they're a step in the right direction. If you don't like what a CEO or some other muckety muck makes, then buy some shares in the company and make your voice heard.

Last year, only a tiny fraction of U.S. company shareholders voted against executive compensation plans, and even fewer companies followed through with actual pay cuts. And it's worth noting that in cases where shareholders are voting against pay packages, their majorities haven't been overwhelming. Some 45% of Citi shareholders supported the company's compensation plan at Tuesday's meeting; 48% did so at HP last year and 46% at Motorola two years ago.

In the Citigroup case, shareholders appear to have a legitimate beef, but compensation matters rarely are clear cut. Last year, total pay for the bank's CEO, Vikram Pandit, reportedly included a $1.67 million salary and a $5.3 million cash bonus, as well as a $40 million retention package that was to be awarded through 2015. What Citigroup investors rejected yesterday is a pay plan that awarded Pandit $14.9 million last year. (It's unlikely Pandit or the bank's other top execs will have to return pay they've already received.)

Pandit's $14.9 million in compensation is considerably higher than for the CEOs at comparable financial services companies, The New York Times reports, though he had accepted an annual salary of only $1 in 2009 and 2010 amid the financial industry meltdown. Meantime, the bar Citigroup set for executive incentive payments last year "was set ridiculously low," according to bank analyst Mike Mayo, quoted in a Forbes article. And consider that Citigroup's share price declined 44% last year.

This debate about "outsized compensation" wafts into the realm of the IT organization from time to time (I wrote a couple of unpopular columns on the subject a few years ago). For instance, it was reported several years ago that HP's then-CIO, Randy Mott, was awarded a $15 million compensation package, including stock options and bonuses. Without considering what HP got for its $15 million, critics complained that Mott was overpaid, as if IT executive compensation should be dispensed according to a civil service pay grade. Mott's IT consolidation and restructuring efforts ended up saving HP hundreds of millions of dollars while tying projects more closely to business priorities.

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Janco Associates last year published a list of top IT executive compensation, gleaned from the financial reports of select public companies. Among the execs on its list were Aetna's executive VP of operations and technology, Meg McCarthy ($5.1 million), Boeing CTO John Tracy ($3.6 million), FedEx CIO Rob Carter ($3.2 million), and Home Depot CIO Matt Carey ($2.9 million). In comparison, IT executives at large North American companies earn median compensation of about $161,000, according to InformationWeek's 2012 IT Salary Survey. So does that mean the above CIOs and CTOs are grossly overpaid?

Of course not. You can't judge these things in a vacuum. The fact of the matter is, some executives are worth more than others--and some are worth a lot more. The competitive market decides, not some social justice arbitration committee.

Looking to another industry, Major League Baseball players' "exorbitant" salaries continue to rise because that semi-competitive labor market continues to support those huge raises. Much less so in the NHL, whose economics forced a realignment of player salaries a few years ago. Do baseball players "deserve" to make a lot more money than hockey players? Do they work harder? Are they "better" performers? Such assessments are irrelevant. The forces of supply and demand set the benchmarks, not some litmus test of what's "fair."

I've always found it a bit odd that people take issue with the financial success of others, as if that largesse is coming out of their pockets. But I can understand the angst when it comes to blatant underperformers. I'm no fan of big raises and bonuses for executives at companies that take taxpayer-funded bailouts. And while no one likes the huge severance packages ousted CEOs receive, they're the contractual cost of attracting big name executives, even if they end up feeling like "pay for failure" deals.

If you're a shareholder, employee, or big customer of a company and think its top executives are making way too much money, you have forums to express your dissatisfaction. Use them. Otherwise, such matters are rarely any of your concern.

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Number 6
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Number 6,
User Rank: Moderator
4/19/2012 | 8:16:19 PM
re: Do IT Execs Make Too Much Money?
First, any shareholder resolution that gets more than about 15% of the votes is considered significant considering the roadblocks for approval and the tendency of institutional shareholders to not vote their shares or go along with the board's recommendation.

Second, one of the main objections by ISS and others to the Citigroup compensation plan was that it was not based on any quantifiable performance objectives. Take a look at the requirements of IRS Section 162(m) for example.
EVVJSK
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EVVJSK,
User Rank: Apprentice
4/20/2012 | 5:22:43 PM
re: Do IT Execs Make Too Much Money?
Agree with the 15% concept. The fact that anyone cares enough to muster some level of energy to go against the board (especially if it is a grassroots movement and not a power play) means that the board had better be listening to at least curb the bad practice or shed more light on the fact is has surfaced.
Can't comment on IRS Section 162.
With respect to IT (CIO and others), if they have made a significant contribution to the corporation they should be rewarded. It would be sad for a CIO to get 15 million and the rest of the IT workers to not get a significant bonus (take a Million out of the 15 and make sure to spread it around, it will go a LONG WAY) to folks making significantly less who are often critical to the solution as a whole!
One final point, THE MOST IMPORTANT PEOPLE to a company should be the Customers. Seems like FAR too many employees, boards, shareholders, executives, etc... paying lip service to that fact (and subsequently regret doing so). Paying execs high salaries (as opposed to fixing a few customer problems for free), paying high dividends to stock holders (as opposed to giving customers a great support infrastructure to deal with problems), paying for expensive company outings( and not reinvesting in R & D ) etc.. are recipes for waking up one day to find out that some company has stepped up and surpassed you (while the board, stockholders, CEO, etc... were patting themselves on the back and paying themselves lots of money). No one begrudges Executives and Stockholders making some money, but when the lose sight of the customers in doing so, it usually catches up with a company sooner or later (unfortunately it is often after the CEO or other execs are out the door with a few big payoff years and an golden umbrella) !
YMOM100
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YMOM100,
User Rank: Apprentice
4/20/2012 | 11:14:29 AM
re: Do IT Execs Make Too Much Money?
All executives in publicly traded companies get more than what they deserve. While they make big decisions, they do not have any responsibility as to success or failure. And even if they are considered no longer useful to a company, they get bought out and have severance packages in the millions thrown after them. Any worker in the trenches gets a card board box and an escort out the door, if not even a law suit for negligence or other things.
I don't see executive pay to go down or worker pay to go up, which means the only solution is to do as Robin Hood did: take from the rich and give to the poor. Tax incomes above 150,000 with at least 30% and include all kinds of income and financial gains in that. That will still leave plenty of money to buy new golf clubs and a Maserati.
frederico
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frederico,
User Rank: Apprentice
4/20/2012 | 6:57:14 PM
re: Do IT Execs Make Too Much Money?
the annual reports should include the total expense paid by the corporation right under the name of each director . It is now extremely hard to determine the amount of loot the various directors receive. the total cost should include all fringe benefits ie insurance,special transportation costs,special committee fees, corporate meals,awards and every expense that adds up
MyW0r1d
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MyW0r1d,
User Rank: Strategist
4/20/2012 | 11:49:32 PM
re: Do IT Execs Make Too Much Money?
I believe all of them far exceed what is reasonable and I am no fan of pro sport's retribution either, but the CIO/CTO "should" a partner in the executive operational hierarchy of a company comparable to the other C level members. They are all excessive when you consider public official's remuneration like Mr. Obama or his cabinet staff (have they any less responsibility). I found the list of top technology execs interesting in that not one bank or trading firm was listed considering the billions they manage but Home Depot made it (this is better than the Time most influential list :-).

The shareholder's should keep their noses out of day to day operational decisions, that is what they hire the CEO and staff for, however, they should weigh in on the performance of those individuals through the Board and the President. To do so intelligently and objectively, I also agree with Frederico in that the salaries of these individuals should be published in the annual reports, but lets put a limit on anything over $1m annually (still 2-3 times the highest paid public official) or to C level staff. Far too many are not performing and still being "maintained" and provided with contracts which award them even when resigning under questionable performance.
Certifiable
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Certifiable,
User Rank: Apprentice
4/24/2012 | 8:36:41 PM
re: Do IT Execs Make Too Much Money?
Here in a nutshell, is the problematic attitude:
"And while no one likes the huge severance packages ousted CEOs receive, they're the contractual cost of attracting big name executives, even if they end up feeling like 'pay for failure' deals."

No contract with upper level executives should shield them from the company's poor performance or failure through no-penalty contracts that reward bad decision making or oversight! It is simple as that. When a line level worker gets shown the door, with little or no severance pay when he/she makes a costly mistake, we all understand that. When a CEO destroys or costs a company dearly, we have to understand that all rational consequences go out the door because of the enshrined golden parachute contract. This isn't about class warfare, it is just basic cause and effect! Why should chief decision makers get to avoid the basic laws of business and common sense? Are they somehow "better" than the rest of us? What they fear is real financial and criminal accountability. Contracts that shield them don't produce better CEOs, just better pirates.
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