Graef Crystal and the question of CEO pay

When I reported on business for the Democrat and Chronicle here in Rochester, N.Y., one of my favorite news sources was Graef Crystal.  He was one of the architects of the system of corporate compensation we have today – not just a salary, but the maze of incentive bonuses, stock options, pension benefits and other complexities that make it so difficult for the lay person to figure out what corporate executives actually get.

At some point Crystal stepped back from what he and his colleagues had done with a sort of “what have I done?” reaction – something like some of the scientists who worked on the Manhattan Project.  When I had contact with him, he had started a new career as a researcher, lecturer and writer on the abuses of corporate executive compensation.

Graef Crystal

What he concluded from his research is that there was no relation – not even a negative relation – between what CEOs and other corporate executives got, and the performance of their companies.  Some high-performing companies had high-paid CEOS and some had (relatively) low-paid CEOs; some low-performing companies had (relatively) low-paid CEOs and some had high-paid CEOs.  It was all random, he said.

As a reporter, I liked Crystal because he always gave me a pithy quote.  He once did a study comparing the compensation of British and American CEOs who headed comparable companies and delivered comparable results.  “You would always want to hire the Brits,” he said.  “They deliver the same results for less money.  And besides, they speak better English.”

In that era Eastman Kodak Co.’s board of directors in the 1990s replaced Kay R. Whitmore, the last of the CEOs to be promoted from within, with George Fisher, who was hired away from Motorola.  At the end of Fisher’s tenure, Crystal noted that in terms of return on investment to stockholders, Kodak actually performed better under Whitmore than under Fisher.  “You paid a Cadillac price for a Chevrolet,” he said, “and the Chevrolet turned out to be a lemon.”

Fisher, in addition to his multi-million-dollar salary, was given an “incentive bonus.”  In his first year, he received a “guaranteed incentive bonus.”  I asked a corporation compensation expert (not Crystal, I forget who it was) why somebody at that level needed an “incentive bonus.”  It seemed to me that most corporate executives had a good work ethic and didn’t – and shouldn’t – need to be bribed to do a good job.

The expert said the purpose of the incentive bonus was to remind the CEO of his priorities – which is not to create jobs, not to serve the community, but to deliver the maximum possible return to stockholders.

If someone’s philosophy is that the responsibility of corporate executives is to the stockholders, and the stockholders alone, I would think the person would welcome the “say for pay” legislation, which gives stockholders a vote on executive compensation.  But “say for pay” – supported by Barack Obama both as Senator and President – was strongly opposed by corporate executives and boards, and was watered down considerably before it was included in the current financial reform bill.

The bill requires that stockholders vote every three years on the compensation of the top executives of their companies, but that the vote not be binding on the board of directors.  The stockholders have the power to change the rules on their own initiative, but directors have the real power.  They can, for example, cast the votes of non-voting stockholders in their own favor.  Most discontented stockholders just sell the stock.

The vast majority of corporate executives are employees, not entrepreneurs like Jeff Bezos of Amazon or Steve Jobs of Apple Computer.  They don’t take the risks of entrepreneurs. They are hired by existing organizations to do a job, just like other employees.  A company in which the pay of executives is going up while the pay of other workers is being driven down is like an army in which the pay of officers is going up and the pay of enlisted ranks is doing down.  Attributing a company’s profitability to the executives alone is like attributing an army’s victories to the generals alone.

I don’t have a good answer to this.  The Cato Institute says there are two points of view on the subject – one is that CEO pay is getting out of hand, the other is that it’s not up to the government to decide what corporate executives are paid.  I have to say I agree with both points of view (unless the executives are employed by corporations that are being bailed out by the taxpayers, in which the government should have a say).  I think CEO pay is out of hand, I don’t advocate having the government setting executive pay, and I don’t have a good alternative.

Maybe just talking about the subject will have some effect.  Maybe public opinion will have some effect.  There already has been some moderation in CEO pay.   But I think the long-term trend is up.  To the extent that companies set executive pay by benchmarking other companies, there will be a long-term ratcheting up, because no company will want to give its executives less than the median; that would be admitting their executives are worth less than their peers.

This 2008 chart shows that average CEO pay moderated somewhat during the past decade.

Graef Crystal is still around.  Click on The Crystal Report for his home page.  Be it noted that Crystal is not an egalitarian.  He just thinks that executive pay should have some rational basis.

Click on Executive Paywatch Database for a data base of CEO compensation by company.

Click on Executive Compensation Wizard for a data base on executive pay by company and by name of executive.

Click on The Pay at the Top for a New York Times listing of 199 companies with CEO compensation and financial results.

Click on Boards Use Peers to Inflate Executive Pay for a New York Times article on how corporate boards tend to benchmark executive pay based on higher-paid peer executives.

Click on Policy Brief on “Say on Pay” for a criticism of “say on pay” on the grounds that it would dilute the authority of corporate boards and give stockholders too much power.

Click on ‘Say on Pay’ Won’t Prevent Bonus Gluttony for a criticism on “say on pay” on the grounds that it will be ineffective in limiting executive pay.

Click on The new say on pay law: a primer for four ways in which corporate boards can defend high executive pay.

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One Response to “Graef Crystal and the question of CEO pay”

  1. How Washington made the rich richer « Phil Ebersole's Blog Says:

    […] Graef Crystal and the question of CEO pay […]

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