Down To Business: Another (Unconventional) Look At Executive Compensation

Readers, for the most part, welcome InformationWeek's skeptical, don't-take-every-issue-at-its-face-value approach. Except, perhaps, when it comes to executive compensation. The conventional wisdom is that top CEOs (and even CIOs) make way too much money, as if there's a natural ceiling. More than a handful of you scolded (or blasted) me for my arrogance in daring to argue two weeks ago that this issue is more complicated than the general media make it out to be.

I'm not going to fall on my sword and pretend that CXO pay isn't extraordinary and that greed isn't a factor. What I will argue is that these compensation packages are more often a function of the incontrovertible forces of supply and demand than of nepotism, negligence, incompetence, deception, fraud, or some other scheme. Every CEO isn't Jeff Skilling, Bernie Ebbers, or Dennis Kozlowski. Every company isn't a lurking SOX violation. Every board isn't asleep at the wheel.

One of the friendlier readers expressed it well. "One of the reasons that our economy is more stable, dynamic, and wealthy than Third World countries is because of the transparency and honesty that we require of companies in reporting. If they overpay, that's not illegal, but their owners may eventually punish profligate managers."

Several readers pointed out that executive compensation is out of whack with rank-and-file wages. It's true. In 1982, the gap between what a large-company CEO and an average worker made was 42-to-1; now it's around 400-to-1. The fact remains, however, that most of that compensation is dispensed in an open, competitive market. If shareholders don't like what the CEO or other top execs are pulling down, they can vote with their feet or apply direct pressure on the board of directors, as a Home Depot investor group did, leading to the recent ouster of CEO Robert Nardelli.

We may not like that Nardelli walks away with a $210 million exit package, but that was part of the price of luring him from GE, where he was a star under Jack Welch. A contract is a contract. Could Home Depot have found cheaper talent? Sure, but Nardelli was considered one of the nation's top execs at the time. And while his arrogance may have done him in at Home Depot, he was no slouch, doubling the company's sales and more than doubling its earnings per share during his six-year tenure, while creating 100,000 net new jobs.

How about Hewlett-Packard CIO Randy Mott, who was lured away from Dell 18 months ago with a $15 million compensation package? A few readers suggested that scores of competent business technology execs would have lined up for the job for a small fraction of what HP is paying Mott. So what? HP CEO Mark Hurd didn't pony up for Mott because Mott's a buddy or Hurd likes throwing HP's money around. On the contrary, Hurd is as calculated a negotiator and as tight a spender as they come. The market placed a considerable premium on Mott's unique experience, skills, and talents, and HP is now reaping the returns on its investment.

Other highly paid execs don't work out so well for their companies--the list of failures and disappointments is endless--but that's the risk of competitive bidding. There's nothing so clear as hindsight.

To argue against artificial caps and controls on executive compensation isn't to denigrate the millions of hard-working wage earners. Capitalist markets are full of inequities, real and perceived, but in the end their attributes far outweigh their flaws. All we can and should do is crack down on dishonest behavior and hold people, including company board members, much more accountable for performance.

Meantime, if you're the chief of a company in financial turmoil and you're laying off thousands of people, make at least the symbolic gesture of taking a hit yourself. Even if the market dictates that you can command a higher compensation, that doesn't always mean you should.

Rob Preston,
VP/Editor In Chief
[email protected]

To find out more about Rob Preston, please visit his page.