Overpaid and underpaid CEOs and the $500,000 executive compensation cap for bailout beneficiaries

“By now you’ve probably heard about the proposed $500,000 compensation cap for bigwigs at companies that are receiving ‘extraordinary’ government bailouts. (Bonuses will also be prohibited, it seems, though normal stock dividends are OK),” Selena Maranjian writes for The Motley Fool.

“I suspect that most of us clapped our hands in glee about this. After all, most of us are sickened at the outrageous compensation packages so many CEOs are getting these days, even when they don’t seem to be performing particularly impressively… It’s not hard to look at companies with terrible performances and find CEOs taking home millions. Tenet Healthcare’s (NYSE: THC) Trevor Fetter, for instance, received more than $10.5 million in 2007, according to the company’s proxy filings. The company’s stock fell 27% in 2007, and 77% in 2008,” Maranjian writes.

“A few months ago, the proxy-advisory firm Glass, Lewis released a report that evaluated CEOs on the basis of performance and compared their pay to peers,” Maranjian writes. “Here are a few examples of overpaid and underpaid CEOs from the report:”

Most overpaid:
1. Sprint-Nextel (NYSE: S)
2. KB Home (NYSE: KBH)
3. Jones Apparel (NYSE: JNY)

Most underpaid:
1. Apple (Nasdaq: AAPL)
2. MEMC Electronic Materials (NYSE: WFR)
3. Leucadia National (NYSE: LUK)

MacDailyNews Note: Apple named Steve Jobs Interim CEO on Sept. 16, 1997. Apple’s split-adjusted share price closed that day at $5.49. Even amidst the current market carnage, AAPL closed today at $99.72. That’s a 1716.39% increase during his tenure. We can bring ourselves to do the math for the day it closed at $199.93 (Dec. 28, 2007).

Maranjian continues, “While capping pay for those needing a bailout seems reasonable to me, I confess to being uncomfortable with suggestions of widespread CEO salary-slashing. That’s because some CEOs, while enjoying generous compensation, still serve their companies well, by leading them to even more generous profits.”

“All this relates to the general idea of how you compensate executives. If you pay in stock options with terms that encourage positive stock performance, then executives will have every incentive to increase share prices, for the mutual benefit of both themselves and shareholders,” Maranjian writes. “On the other hand, if companies put together lavish pay packages that include things like big no-fault severance payments, executives know they’ll end up well-off no matter what, reducing their incentive to work to maximize share value.”

Maranjian writes, “All of us should consider the incentives we have to do things.”

Full article here.

MacDailyNews Take: “Consider the incentives we have to do things.” That would’ve saved Karl Marx a lot of time.

Systems that ignore basic human nature are doomed to failure. Rewarding failure while penalizing success seems backwards to us. Better to work with human nature than against it.

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