2002 - Golden hellos
At a time when so many companies
are seeking to retreat from their social commitments
to employees it was heartening to see how General
Electric had sought to look after Jack Welch,
the most celebrated of its old boys.
Few could argue that the corporate
jet, the chauffeured limo, New York apartment,
the Augusta National golf club membership, the
cable TV subscription and the ringside seats at
various top sporting events had not been thoroughly
deserved by the value-adding achievements of America's
favourite corporate son.
Most probably there would have been no
argument at all had the perks not appeared in the divorce
court filings of his estranged wife. But they did appear
and they did cause a fuss, not to mention an unwelcome investigation
by the Securities and Exchange Commission. Mr Welch appeared
on the chat-show circuit in order to defend the deal before
announcing that he would pay for most of the perks, worth
more than $2m (£1.2m) a year, out of his own capacious
That should not be difficult for someone
who retired on a $9m-a-year pension along with various types
of stock option, worth last year about $775m and existing
stock holdings that must have been worth as much before
the market declined. Suffice to say that Mr Welch has enough
to get by. But that is not the point according to one of
his soul mates, Barry Diller, the chairman and chief executive
of Vivendi Universal Entertainment. In the Financial Times
this week, Mr Diller described shareholder resentment as
"really rotten". How could they forget the outstanding
work of Mr Welch so quickly?
Mr Diller should look around.
The public and shareholder mood has changed. Shareholding
institutions want some restraint in the escalating
remuneration culture that has dominated the most
senior ranks of US capitalism during the past
Whether the recommendations published
last week by the panel of worthies put together
by the Conference Board, a research organisation,
will be enough to deliver this goal remains to
be seen. The panel's suggestions, including performance-related
options, more long-term share incentives, and
pay consultants reporting to remuneration committees,
seemed reasonable enough. But will they work?
Another report, Golden Hellos*,
attracted far less press coverage when it was
published the same day. This is a pity because
its findings suggest that it may take something
stronger to slow the pay and remuneration bandwagon.
This report, written and compiled by Paul Hodgson,
senior research associate, CEO compensation, focuses
on the growing tendency among large US companies
to pay their incoming chief executives joining
fees equivalent to what they might have earned
in bonuses and options payments had they stayed
with their previous employer. This is the English
meaning of compensation, as an act of restitution
for those who have suffered a loss.
The most prominent of these awards in the
past financial year was the $45m paid to Gary Wendt by Conseco
after he had left General Electric. Mr Hodgson has documented
this and 35 other similar awards paid to incoming chief
executives in the S &P 500 in 2001-2002. They come in
various guises, including discounted share options and retention
loans that need not be paid back if the executive stays.
Some companies even pay the tax on such loan income so the
executive can keep the full amount.
This policy appears senseless
since it subverts the very incentives that companies
are laying in place at the behest of shareholders
to ensure that executives do not concentrate on
short-term results. It smacks of gamekeeper-turned-poacher.
As Mr Hodgson puts it: "If
executives are compensated in full for all of
these elements of pay regardless of whether the
performance targets or service requirements have
been met, then the incentive and retention purposes
of these payments are completely undermined. Surely
this is neither in the interests of the companies
themselves nor of the stockholders."
His message is important. It should be
digested not only in US boardrooms, but in those UK companies,
such as Lloyds TSB and Marks and Spencer, that have already
taken their own tentative steps on the inflationary path
of the golden hello. Lloyds defended its £1.3m golden
hello paid to Eric Daniels when recruited as director of
retail banking, as "what you have to do to get the
right people". Well, yes you have to do that when you
and every one of your competitors install ever more elaborate
retention incentives for incumbents. But where does this
incentive proliferation stop?
It means that today, as Bill
McDonough, president of the New York Federal Reserve,
pointed out, the average US chief executive earns
more than 400 times the average employee's income,
compared with a multiple of 42 about 20 years
The US administration should
be concerned that its earnings elite has become
detached from the day-to-day concerns of the average
citizen. American society is fortunate that its
vast working class (that includes everyone from
the receptionist to the boss) consists, for the
most part, of the "haves" and the "have
more thans". Had this been pre-revolutionary
France, the corporate elite might soon be in search
of its own Scarlet Pimpernel.
The work of the Conference Board
panel is to be welcomed because it is at last
injecting some formulas for restraint and moderation.
But it isn't going to bring down those ratios
as long as recruiting companies counter their
retention incentives with recruitment incentives
in ever-growing stacks of dollars.
The corporate sector seems to
want the best of both worlds. It wants to hold
on to its best people, but at the same time it
looks covetously at the winning generals who marshal
The people who constantly profit
from this "cookie jar" mentality are
the company-hopping executives, the lawyers who
work out the compensation demands and the headhunters
who wield the levers and spin what Mr Hodgson
calls the "revolving door of CEO recruitment".
Perhaps we should take our lead
from a better informed public and more organised
shareholder opinion. If the SEC were to take advantage
of its informal investigation of Mr Welch's retirement
package to demand greater levels of disclosure
in future, it might do everyone a favour, including
the companies that carry on layering the cake.