Monday, November 07, 2005

Former CEO Ed Woolard Criticizes Executive Pay

The News Journal ran a story yesterday about former DuPont CEO Ed Woolard criticizing runaway executive pay:
"I'm afraid if something like this goes on, something will happen that CEOs don't like," said Woolard, who heads the NYSE's compensation committee.
Chairing the NYSE compensation committee of the New York Stock Exchange is a significant assignment, given the front page uproar over former CEO Dick Grasso's out of control pay package.
"He's served on some serious corporate boards so he comes to the process bringing gravitas a normal critic wouldn't have," said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
A ten minute speech by Woolard from a recent conference on corporate compensation is available here.
According to the U.S. Bureau of Labor Statistics, CEO pay grew from 42 times that of factory workers in 1980 to 475 times in 1999. The trend has not abated in recent years. The Corporate Library relased its annual survey of executive compensation two weeks ago:
The survey shows a median increase in Total Compensation of 30.15 percent between fiscal 2003 and fiscal 2004, compared to an increase of 15.04 percent in last year’s survey, and a rise of 9.49 percent in 2002.
The controversy over CEO pay is not just about factory workers. How has your stock portfolio done recently? Paul Hodgson, Senior Research Associate with The Corporate Library's Board Analyst observes that executive pay is not just about the eye-popping numbers:
“CEO compensation is one of the most visible and telling indicators of the effectiveness of corporate governance but our findings have yet to show an overall improvement in pay practices despite the continued high level of public attention, calls for restraint, new exchange listing rules, new director independence requirements and new best practice statements.”
The NYSE experience with Grasso is a good case in point. The scandal was not just Grasso's pay, but the fact that his board didn't know what he was making. A board that lets a CEO take home enormous sums is often a board that isn't paying attention to other important matters of corporate governance.
Woolard debunks the myth that CEOs earn this pay by creating wealth for their shareholders. Decades of research has failed to identify a reliable correlation between CEO compensation and corporate performance. One factor driving CEO pay higher is the "Lake Wobegon effect," as noted in this speech by Kim Clark, dean of the Harvard Business School:
Moreover, the use of [compensation] consultants (and the way it's done in a lot of companies) creates what I call "the Lake Wobegon effect." You recall that in Lake Wobegon everybody is above average. And in a lot of companies the way the system works is most CEOs want to be at the 75th percentile of the distribution of compensation. Well, you can imagine what happens. You get a ratcheting up effect as that information pervades the market, and we get serious distortions in CEO compensation.
Because boards seem reluctant to admit that their CEOs are below average, they contribute to the continually escalating pay. The bottom line for Woolard?
"I'm not some evangelist. I don't care how much money these people make. I'm concerned about the future consequences if it continues unabated," said Woolard.

2 Comments:

Blogger Dana Garrett said...

Great post. You really did some good research on this one.

10:25 PM, November 07, 2005  
Blogger TommyWonk said...

Thanks Dana. It's an area I'm familiar with from business school.

UD's Center for Corporate Governance (funded in part by Ed Woolard) is in the forefront in terms of researching the issues and advocating holding CEOs and boards accountable. Charles Elson is constantly in demand to speak about or comment on corporate governance issues. His seminars are legendary for the panelists he attracts and the discussions that ensue.

12:06 AM, November 08, 2005  

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