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Proposed legislation, corporations take a closer look at executive compensation packages
Fortune magazine reported in 2003, the CEOs of its famous 500 list made $3.3 billion collectively. That made for a whopping average of $6.6 million.
The typical salary for a U.S. CEO is $1 million to $3 million, with cash bonuses ranging between $10 million and $15 million, Fortune reported.
Stock bonuses can be as much as $20 million, with some options being exercised for $100 million to $200 million.
In addition to the money, some chief executives command retirement plans, health and life insurance, chauffeured limousines, executive jets and interest-free mortgages.
In the wake of high-profile CEO debacles such as Home Depot, ADT, Enron, Hewlett-Packard and the Big Eight accounting firms, many people are asking how much is too much.
Rep. Barney Frank, D-Mass., is proposing legislation to cap executive salaries. Several corporations are proposing that share holders vote directly on top brass compensation packages.
So, who sets these prize compensation packages, complete with a seemingly platinum parachute, even if the company crashes in the red?
"No one sets their own salary," said James Farris, president of James Farris Associates, an Oklahoma City executive recruitment firm. "Salaries are negotiated to attract executives away from their current position. It's a reward for leaving a nice position to save you or to increase your profits."
He added that there is much personal and professional risk involved in changing jobs at this level.
Joy Reed Belt, CEO and owner of Joy Reed Belt Search Consultants, agreed.
"The business has to determine how hard it is going to be to attract who they want," she said. "You have to look at what their current compensation is."
Publicly owned American corporations typically have a compensation board which is comprised of members of the board of directors and charged with determining appropriate pay and benefit levels for top management.
Frank's proposal is in direct opposition to the American system of allowing the market to determine prices.
Belt believes that allowing shareholders to vote directly on executive salaries is not practical because it makes the fact that an executive is considering leaving his or her position public. She also cited media scrutiny as another reason to keep negotiations low-profile.
Both Farris and Belt, however, say the stockholders' role is crucial in determining executive salaries because they elect the compensation board.
"Stockholders control who is elected to the board," Belt said. "You need to look at the slate of officers and look at their track records."
Farris added that shareholders should not look at their votes as insignificant. If enough people vote against the recommended slate, it will send a message or possibly even oust an ineffective board member.
Farris also believes that well-run corporations are moving away from the cronyism of the past on boards.
"They're looking for more people with the set of expertise that they need to make good decisions," he said.
He also noted that human resource professionals are being nominated to corporate boards more often.
"They want to make sure they can't be criticized for what they're doing," Farris said.
This most recently has been illustrated by the exit of former Home Depot CEO Robert Nardelli earlier this year. Although company revenues and profits were up, stock prices were down sharply.
Nardelli was able to leave the company with a $210 million severance package, despite the company's poor performance on his watch.
"That deal was locked-in by Home Depot during negotiations," Belt said. "At the time, they wanted him so badly, they agreed to it and they didn't see a chance of anything going badly. If things had turned out differently, he'd be a hero."
Belt believes Home Depot and other corporations will be more prudent in the future.
Farris believes that salaries should be linked to performance, but he also believes not all executive salaries are bloated.
"If you look around Oklahoma City, the Larry Nichols (CEO of Devon Energy Corp.) and Aubrey McClendons (CEO of Chesapeake Energy Corp.) are not 8-to-5 employees. They take enormous risk with their companies, their reputations and their own economic situations. They deserve to be rewarded," Farris said.
"These companies give back to their communities," he continued. "When the companies perform well, they employ more people and their employees make moare money, their stock does better and it helps the city."