Thursday, 2 January 2014

Are we overpaying our executives...

Blackberry recently announced a major shakeup in their executive roles as part of an ongoing restructuring plan.  Thorsten Heins stepped down as CEO less that two years after assuming the position, a period during which the stock value declined to near all time lows.  For his efforts he departed with a package in the range of $14 million dollars or roughly $21k for every day he held the job.  That means that on a long weekend he earned more than the average employee earned in a year.  And he FAILED.  Apparently he was only able to walk on water when it was frozen. 

Details from company documents suggest that his package could have been worth as much as $55 million if the company had changed hands and there had been some success from his efforts.  That translates to something in the order of  $82k per day meaning that on that same long weekend his income would have put him in the top 1% of all Canadian income earners in a YEAR.

But poor Mr. Heins compensation pales by comparison to the most noted failure in Canadian corporate enterprise.  That distinction falls to John Roth who rode Nortel from a net worth of over $350 billion to ultimate bankruptcy.  His tenure as CEO lasted less than 1400 days and yet reports say he earned something in excess of $130 million, much of it in stock options, before the company collapsed.  In simple terms, Mr. Roth earned in excess of $90k for each and every day that he was in control.  That is roughly 4.5 times what Heins earned to fail at Blackberry - and that is not adjusted for inflation.

Statistics Canada data for 2011 would put Mr. Roth's income for a long weekend in the top 1% of all ANNUAL wage earners in the country.  I can only imagine what he might have earned had Nortel succeeded.  Regardless, it is small  consolation for the 55,000 pensioners who have had their benefits slashed as Nortel headed towards its demise.

These examples are, admittedly, at the extreme end of the executive compensation debate.  But they are not wildly at odds with the present day reality of Canadian corporate compensation. 

Somehow there has been this fallacy develop that suggests that there is only one person capable of leading a company to success.  Therefore it becomes necessary to essentially pay whatever it takes to get that person to commit to the role.  To this notion I have just one word...hogwash.

In the two examples that I quoted, both men were quickly replaced.  Apparently the talent pool may not have been that shallow after all.  Microsoft is currently seeking a replacement for Steve Ballmer.  The selection committee is said to have started with a list of about 100 potential candidates before quickly working it down to about 20.  For a company that large and successful it appears that there really is more than one person who has the qualifications to be their next leader.  So it begs the question '...if it works at Microsoft, what makes other companies so unique that there is only one candidate to lead...'

Please don't get me wrong, I am not against a well paid CEO.  But is the boss at Royal Bank really worth 360 times more than the average teller.  Gordon Nixon made about $12.6 million versus a tellers wage of $35k.  What bothers me the most is not the salary of $1.5 million.  Rather it is the bonuses of $11.1 million for simply doing the job for which he has been hired.  If the Bank can justify a bonus almost 8 times the base salary, why are the tellers not in line for another $275k per year for their work. 

Very often the bonus consists of stock options.  And while there is no guarantee that the stock value will improve, there is no risk to the option holder if it does not. It strikes me that if someone is going to benefit from stock options, there should be more risk in the equation.  Perhaps an executive needs to hold personal company stock that represents 50% of the value of options that are granted.  In this way the individual bears some of the same kind of risk that any shareholder carries.

There are no quick and easy answers to this issue.  It is unlikely that we will see a CEO step forward to say that they are over-compensated.  And I don't see legislation as the appropriate answer.  I would be interested in your thoughts so that a future posting can present some options.

1 comment:

  1. Well said Jim, but unfortunately it is a sign of the times! It is mind boggling to see and try to understand how these Companies, Financial Houses, as well as Government justify rewarding people who fail miserably!
    Have a Happy Healthy and Prosperous New Year!