The Nytimes.com had an article today on CEO pay packages. As a CEO and a shareholder in companies, I find the pay packages these guys are receiving to be just plain robbery of public companies.
Basically, here is how their scam works: The Board of Directors at a public company sets the pay for each CEO. Who is on the Board of Directors? Mostly CEO’s from other public companies. They will vote to give the CEO any amount of money he asks for regardless of whether he actually earned it… because they expect him and his friends to do the same thing for them on their own boards.
Most of these CEO’s are no different than any other employee at the company they work for. Most of them did not found the company and many of them have not even worked all that long at their company. They should not be earning far more than even the original founder of their company earned. The value they add is not nearly what they claim it is… and in some cases like Marissa Mayer (who made $186 million on the sale alone), they actually destroyed the company they were hired to work on.
CEO’s should be paid mostly with long term vesting stock options (options that vest in 3 years, 5 years, 7 years, 10 years). NOT in cash today and NOT in stock grants today. They should be paid for actually improving the long term success and viability of a company.
I think any honest CEO would cap their own cash pay at no more than 2x their next highest paid employee and no more than 20-30x their lowest paid employee.
You do need to motivate a CEO like Steve Jobs to be interested to come back and take over a monumental project like helping put out the fires at Apple and build it into a titan, but that should be done with long term stock options that have vesting prices well above today’s current stock price.
I even dislike the pay structure that founders give themselves as CEOs… they often give themselves enormous stock options that come at the expense of their partners in their businesses – their shareholders. The shareholders are like silent partners who have no power – the CEO has all the power and typically just grants himself higher and higher percentages of the company. A great example of this was Larry Ellison who paid himself $67.3 million in stock options in 2014… he did not even do much work as he spent most of that year vacationing. I consider that outright theft of his partners / shareholders in Oracle.
How can this problem be fixed? We need to adjust corporate governance so that a Board of Directors is truly independent and aggressively defends the interests of the shareholders. A Board should act in the same way I personally would as owner of Coalition Technologies if I was hiring a CEO – I’d look for the most talented person at a reasonable cost.