Are CEOs getting a bad rap? In a word, yes. As a top ceo coach, I can tell you that CEOs are under siege…in fact, I would go so far as to say that CEOs as an occupational class are in a state of crisis. I understand that Americans are upset about the economic debacle we find ourselves presently entangled in. I’m upset and outraged as well. What’s frustrating to most is that there are many more questions being posed than answers being given at this point in time. We’ve entered the blame zone of rash allegations and finger pointing in order to deflect responsibility. While I understand that no sane person could have watched the events of the last few weeks and not want to pin the blame on someone, simply assigning “villain” status to chief executives as a class because their compensation plans seem egregious to some is not the answer. In today’s post I’ll examine the issue of CEO Compensation and why I believe CEOs are unfairly being vilified.
So, is CEO compensation out of control? In some cases I absolutely believe it is, but not in every case as many politicians and pundits would have you believe. I take great exception to those chief executives that take advantage of the position they hold, the shareholders they represent, and the relationships they’re entrusted with. That being said, the CEOs described in the preceding sentence don’t constitute the majority of chief executives. I have called for transparency in previously addressing the issue of Rogue CEOs and Board Accountability. That being said, rogue CEOs are the exception and not the rule. Most chief executives are hard working professionals who take their fiduciary obligations very seriously. Moreover they hold the position of chief executive while incurring great personal risk and sacrifice.
At face value, I don’t care how much money a CEO does or doesn’t make. The issue is not the amount of remuneration paid out to CEOs, but rather on what basis, and when it is paid out. Simply put, CEOs that perform deserve all the compensatory benefits that accompany said performance, and to compensate them for the risk they undertake. Conversely, those CEOs who fail to perform have no business maximizing compensation to the detriment of the stakeholders they were supposed to be serving. Let me use the actual case of Dick Fuld, the former CEO of Lehman Brothers to see if I can help you clarify your thoughts on the topic of CEO compensation. I would ask that you watch the video and form an opinion from what you see:
If you were to just watch the above video of his recent testimony without knowledge of the whole picture, I think you would probably come to the conclusion that he displays a lack of sincerity, credibility, and remorse. One of the oldest and most highly regarded investment banks failed on his watch, and all you witness in observing his testimony is what appears to be Dick caught in a self-serving, sanctimonious CYA maneuver. Now, lets take a look at things with a bit more disclosure, and from a bit of a different perspective. Look at the following revenue and profit numbers (I rounded the numbers for simplicity sake) under Dick’s leadership of Lehman Brothers leading up to the failure:
- 2004 Total Revenue: $21 Billion – Net Income: $2 Billion
- 2005 Total Revenue: $32 Billion – Net Income: $3 Billion
- 2006 Total Revenue: $46 Billion – Net Income: $4 Billion
- 2007 Total Revenue: $59 Billion – Net Income: $4 Billion
During the time frame noted above, Lehman showed steady growth in both revenue and profitability under Dick’s leadership. If you look at the most aggressive estimates of the amount of his total compensation during that time period it totals nearly $480 million dollars. This number is less than 1% of the $140 Billion of gross revenue and less than 4% of the $13 Billion of net income earned over the same period. I don’t believe this number is in and of itself a bad number, especially given the fact that most of Fuld’s compensation was incentive based. Fuld had no employment contract, received no golden parachute upon exit, and there were no last minute insider stock trades that he benefited from. Dick Fuld didn’t receive excessive compensation any more than his other executives and investment bankers did. They were highly compensated in an industry that offers lucrative pay. While not palatable to all, it is certainly not a crime.
The real issue surrounding Fuld is not his compensation, but rather his poor decisioning in failing to manage the risk associated with the complex synthetic and derivative securities they were participating in. However he was not alone in this regard, as all other financial institutions were trading in these securities as well.
Let me shine the light squarely on those individuals whom I believe are the real culprits in this debacle. It was not the investment banking CEOs, but the corrupt CEOs of Fannie Mae, Freddie Mac, and the corrupt politicians who allowed them to function without oversight and accountability. I must also chasten the shameless politicians who use national tragedy and congressional testimony as a publicity platform to air venomous soundbites in order to transfer blame and cater to their constituencies leading up to an election. Oversight is a good thing, but where were these concerned politicians leading up to this mess. Arm chair quarterbacking and shameless self-promotion at the expense of others is not why we elect our public servants, but I digress…
Bottom line…it is not wrong to assign some blame to the rogue CEOs who deserve it, but it is terribly wrong to assign blame to those good chief executives just because CEO is printed on their business card.