The CEO’s pay, bonuses should not be a cause for concern?

home are in the firing line of current political and economic discourse.
Yet again we see a global economic system that is impressed by numbers, whether in percentage terms or monetary terms. All is well as long as the numbers go up, which the CEOs have mastered and have been diligent to deliver. If they deliver, should the CEO not be rewarded?
Is this not the capitalistic dictates which have trained us all to focus on individual performance, numbers and rewards? Nell Minow of Governance Metrics International, a long time proponent of good corporate governance, once said, “I am a capitalist. I love it when executives earn boatloads of money. But it infuriates me when they get it without earning it”.
It is therefore not surprising that Minnow has written several if not hundreds of books and articles on issues related to CEO compensation. The whole debate on CEO pay and bonuses is rooted in the imbalances of reward systems versus responsibility and inequality.
She was echoing the sentiments of John Maynard Keynes who observed that the businessman is “only tolerable as long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society”.
The remuneration drama is predominant within the financial services, especially the banking sector. The profundity of this drama recently touched even the traditionally reserved royal institutions of the United Kingdom, when Sir Fred Goodwin, who is also a former CEO of the Royal Bank of Scotland (RBS), was stripped of his knighthood. Was Mr Fred Goodwin a scapegoat or villain many have asked?
Mr Goodwin was RBS chief executive in 2008 when the bank’s near-collapse prompted a £45bn taxpayer bailout. On the advice of the forfeiture committee whose members include top civil servants and the head Treasury lawyer, the Queen cancelled and annulled the title (Sir).
It is the same bank, RBS, whose board recently approved a bonus to the current CEO of almost £1m, which he had to give up. Is it about the bonus, accountability weakness or sheer lack of sensitivity to inequality? The British Parliament has not been spared either. Last week the Prime Minister, David Cameron and the Labour leader, Ed Milliband clashed over bankers’ bonuses during a prime minister’s question time. The Labour leader had demanded that the government publish the names of all bankers earning more than £1m.
He also called for workers to be allowed to sit on the remuneration committees of major companies so board members would have to look their workforce in the eye as they make pay awards. The Prime Minister had to be reprimanded by the Speaker, for accusing the Labour leader of hypocrisy during the heated exchange. Is it a clash of capital versus labour?
Early economists, David Ricardo and Karl Marx had expressed concern as to whether the free markets trumpeted by Adam Smith could produce an income distribution that was politically tolerable.
As the world is now questioning the legitimacy of capitalism, at a time when the implicit social contract between the rich and the rest of society is weakening, just as the philanthropy depends much on kindness. How can the CEO help reduce this systemic income disparity?
Amid all the critique around CEO compensation, it must be remembered that the general purpose of predetermined high CEO compensation packages is first to protect a CEO from financial repercussions should the most shrewd of their business decision lead to job loss, and second to secure a lasting retirement so that the company decisions made are based on the long-term health of the company.
Calculations of CEO pay and bonuses are based on the above reasoning, which perhaps worked well prior 2007 and the financial crisis.
The board of directors of the Royal Bank of Scotland, which almost collapsed a few years ago, approved a bonus of about £1m, for the current CEO Stephen Hester, as a reward for what was deemed as Mr Hester’s success in reducing the bank’s balance sheet and winding down its investment banking arm.
Analyst marvelled at the board’s short memory that the bank had been bailed out using taxpayers’ money in 2008, and that the share prices in 2011 were not that great. Mr Hester later bowed down to intense media and political campaign and agreed to give up the bonus. The CEO obviously did his job well enough to earn him almost a million pounds in bonus, as he had been promised that the bank would be run on private sector basis. The board was happy with this. What about the shareholder and stakeholders? Who are the shareholders and stakeholders expected by corporate governance to demand accountability of the RBS board? So are the weaknesses in the accountability chains of boardrooms and corporates concerning CEO pays and bonuses, hence calls for stricter controls?
As the blame game increases in momentum, legitimacy of capitalism is also being questioned. Its proponents are quick to defend it and say that there is nothing wrong with the systems, rather that blame is on the new look banking sector. Banking businesses of today are worlds apart from the deposit taking and lending type of simple banking business of the 1930s. Not only is the banking business different, but has become very complex, as to even confuse the bankers themselves. Lord Turner, head of the UK Financial Services Authority, once declared that many parts of the banking business had “grown beyond a socially reasonable size”.
According to Neil Minnow’s Corporate Library, at Merrill Lynch, former CEO Stanley O’Neal received total compensation of more than US$91 million for 2006. The CEO was given that package based on performance numbers, which came out before nearly $23 billion in write-downs by the company.
It is reported that O’Neal received more than US$160 million in stock and retirement benefits while shareholders lost more than 41 percent of their investment value over the year. Three executives brought in to Merrill in 2007, within less than a year, shared a US$200 million payment as they turned over the company to Bank of America in a last-minute deal to help it survive.
American International Group (AIG) replaced CEO Martin Sullivan after the company posted losses for two consecutive quarters totalling US$13 billion. Sullivan’s contract entitled him to about US$68 million. His replacement, a board member who served as CEO for three months before the company was taken over by the government, received as much as US$7 million. It is no wonder Ed Milliband is calling for Boards to look the workers’ representatives in the eye, when approving such numbers.
The boards of directors have approved pay that is completely disconnected to performance. Just as the RBS’ board approved Hester’s “reward for failure” as the British headlines called it, referring to the fact that a bonus of £963 000 was awarded in spite of RBS’s share price almost halving last year in 2011.
Minnow reckoned that after all, it is the world of the ultimate oxymoron: accountability, deregulation, performance, guaranteed bonus and social responsibly. So should we be surprised that executives take the money and run?