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Executive Compensation: Should We Care?

By: Joe Hornyak
September 2007

Executive Compensation

Is executive compensation under attack? One can't help but wonder given the focus put on what executives across North America are earning.

A recent ranking of corporate governance in Canada paid special attention to the fact that how boards of directors handle executive compensation is one of the most important elements of being a good board.

Regulators on both sides of the border have come up with new rules for disclosing executive compensation. These new rules have gone further than ever before in revealing just how much executives are paid, what sort of pensions they will get, and so on.

The recent spring proxy voting season saw record numbers of proposals from shareholders calling for linking executive pay to workers’ pay.

And it is not just disclosure, there is a growing sentiment that senior executives are being paid too much. Lee Iacocca, the former chief executive officer at Chrysler, has been expounding his view that not only are chief executives earning too much, it is far too expensive to part company with them. He wonders about, for example, the value for Home Depot shareholders of paying Bob Nardelli, its former CEO, $210 million to step down.

Now, no-one can accuse Nardelli of being overpaid in his new job as CEO of Chrysler. His salary is $1. Of course, as a private company, Chrysler has no obligation to disclose executive compensation. So the amount and structure of his incentives and other compensation is unknown.

Frankly, the whole issue of excessive compensation is probably unfairly limited to senior business executives. Seldom do we hear cries that Matt Sundin, as captain of the Toronto Maple Leafs, is over-paid at $5.5 million a season.

The difference, we are told, is that chief executive officers are caretakers of shareholder equity in a company and shareholders have a right to know what these executives are making and to see if their stock performance, not the performance of the company – an important distinction, is worth the compensation.

However, that view is almost naïve. Nardelli, for example, more than doubled Home Depot profit from $2.6 billion to $5.8 billion during his tenure.

The other difficulty with linking executive compensation to stock performance is that it can prompt executive teams to sacrifice the long-term success of the company for their short-term compensation gains.

Executive compensation is never an issue at companies which are well-run and where shareholders realize steady, increasing value. It is only an issue in those cases where shareholders, the board of directors, and the media are casting around for someone to blame.

And, let’s not ignore the spectre of other senior executives following Nardelli’s lead. We’ve all heard the lament that government would be so much better if it could compete with the private sector for the best and brightest. What is to keep senior executives at public companies from trying to get their earnings out of the public eye by moving to the private sector? If this exodus does start to take place, have we served shareholders well by creating an environment which encourages this to happen?

What we have here is the free enterprise system. These senior people earn what the market will bear. They, like the rest of us given the opportunity, negotiate the best pay and severance packages that they can.

Do they make too much, in some cases, probably. Will disclosing what they earn change anything, probably not.

Joe Hornyak, Executive Editor Powershift Communications Inc. Toronto, ON

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