Executive Compensation: More Transparency Needed
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Executive Compensation: More Transparency Needed

With the economy in retreat, executive compensation is about to become a major issue once again—as indicated by a Fortune magazine cover story this week.

Paul Holmes


At the end of May, troubled California utility Pacific Gas & Electric petitioned a federal bankruptcy court for permission to give $17.5 million in bonuses to its senior management team, including almost $1 million for chairman Robert Glynn—enough to double his base salary. In its motion to the court, PG&E expressed the hope that the bonus payments would persuade the leadership team to “stay with PG&E over the next several years and continue to contribute to PG&E’s successful operation.”

It is possible that some of PG&E’s creditors might have other ideas about how the company might best spend that $17.5 million—not to mention a different perspective on whether there is any “successful operation” to be continued. According to Timothy Noah, writing for Slate, “The worry is that if [the court] doesn’t fork over the cash, the California utility will have trouble retaining the crack team that ran it into the ground.”

Meanwhile, George Shaheen—who left his position as chief executive at Andersen Consulting (now Accenture) to run Internet grocer Webvan—will make $375,000 this year from Webvan, despite the fact that the company’s stock price recently plummeted to 15 cents a share and it is now preparing for a de-listing. Shaheen’s good fortune is even more striking because (a) he left the company a couple of months ago and (b) the terms of his severance agreement mean that he will continue to receive $375,000 a year from the company for the rest of his—or its—life.

So much for the idea that executive compensation should be tied to the creation of shareholder value: by the end of Shaheen’s tenure, Webvan was worth about a third of its valuation at the time it received its second round of private financing. Shaheen, meanwhile, defended his role at the company by telling CNET, “I’m proud of my contributions, and I came in and worked hard on a business model that was difficult to execute.”

If working hard is the sole criteria, hundreds of thousands of retired workers across America can presumably now look forward to seeing to receiving annual six-figure payments for the rest of their lives.

With the economy in retreat, executive compensation is about to become a major issue once again—as indicated by a Fortune magazine cover story this week. As Fortune reporter Geoffrey Colvin points out, “The American public isn’t angered by big pay. It’s angered by perceived injustice. The last major outcry, in 1991 and 1992, arose from huge CEO pay at a time of recession and widespread layoffs. Pay kept right on rocketing after that, but when the economy got back on track and the stock markets caught fire, who cared? This time the backdrop is a dragging economy and a market collapse that hurt millions of people.”

The Fortune study presents a lucid explanation of the forces at work in driving CEO salaries higher and higher, but little cause for optimism that outrageous and unjust compensation packages can be reined in. It may not be possible to put the brakes on this runaway roller coaster, but it certainly ought to be possible—in this age of transparency—to shed a little more light on the practice.

If chief executives really believe they deserve the huge amounts they are receiving, they ought to be prepared to explain their belief in public, to the two stakeholder groups most concerned—shareholders and employees.

Chief executives should be prepared to use existing means of communication—the employee magazine and the annual report—to justify the compensation they received in the past 12 months, explain how it was tied to performance, how it compared to the compensation of CEOs at peer companies, and how it compared to compensation at other levels of the organization. 

In short, CEOs should at least recognize that they are accountable to their companies’ stakeholders, and that those stakeholders have a legitimate interest in compensation issues.
This kind of simple, direct communication would require courage and integrity, which is why it won’t happen except in exceptional circumstances. But it would go a long way toward restoring the faith of shareholders and employees in the way management works—and it might even result in some CEOs acknowledging performance shortfalls.

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