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Pay at top truly out of whack

By LOREN STEFFY Copyright 2008 Houston Chronicle

Nov. 22, 2008, 1:27AM

We have an old saying in this business: When dog bites man, it’s not news. When man bites dog, it is.

So the latest study finding that top executives for companies at the center of the financial crisis walked away with billions in compensation in the years leading up to the current calamity seems like just another dog nipping at the heels of the beleaguered American stockholder.

Last week, the Wall Street Journal reported that executives from 120 companies, including banks, home builders, mortgage lenders and other providers of financial services, cashed out more than $21 billion in the past five years.

That level of corporate largess goes down hard for shareholders who’ve lost in the neighborhood of $9 trillion in the market since last year’s high.

But tales of runaway executive pay are hardly in the man-bites-dog variety anymore. We may be outraged, but we’re hardly surprised. We’ve come to expect CEOs to reap big rewards even as average worker pay stagnates and company shares languish.

Winning no matter what

The survey, though, is a reminder that the system of paying U.S. executives is fundamentally flawed. Effectively aligning executive pay with company performance remains, in many cases, the stuff of corporate governance fantasy.

The big boys always seem to find a way to win, no matter what.

Of course, some investors may have sold shares during the five-year period, benefiting from the same run-up in stock prices as executives did.

And many executives have lost millions in stock holdings in recent months as the market malaise deepened. Yet those losses, in most cases, pale compared with the gains of previous years.

The usual reasons

Many of the companies mentioned in the Journal study offered standard defenses — the executives regularly sell shares to diversify their holdings, they sold stock granted to them as part of their annual compensation, or the pay was based on company performance.

Yet looking at the performance of, say, Dick Fuld of Lehman Brothers Holdings, which filed for bankruptcy in September and whose shareholders have been wiped out, his pay of almost $185 million — $45 million in cash and $139 million in stock sales — over five years is simply egregious.

Then there’s Daniel Meyers of First Marblehead, a purveyor of student loans, who collected almost $96 million while his company’s shares lost 99 percent of their value. Houston Rockets owner Leslie Alexander, a former First Marblehead director, sold $288 million in stock during the five-year period, the newspaper reported.

Another local member of the list: former HCC Insurance Chairman Stephen Way, who retired last year. He collected almost $122 million before he left, while HCC’s shares have sunk 41 percent, the Journal found.

And so it goes. Another survey, another gallery of corporate pay rogues.

But the lingering question remains: What are shareholders paying for if the performance leads to disaster?

The consequences of bad executive decisions often take time to become apparent — far longer than it takes many boards to award lavish pay packages.

Clawback provision

I remembered a conversation I had at the end of the summer with former Shell Oil Co. President John Hofmeister about reforming executive pay practices.

He suggested a clawback provision that would allow companies to demand the return of compensation tied to performance if it turned out that a company’s stock performance was inflated by bad business practices or malfeasance.

He acknowledged that many of his fellow executives would bristle at the require-ment but argued that the threat of giving back pay would make executives more likely to focus on the long term.

Nothing’s perfect, but …

No system, of course, will eliminate the rewards that have become inherent in stock bubbles.

But somewhere between a $21 billion gain and a $9 trillion loss, there’s a lot of room for improvement.


Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at [email protected]. His blog is at


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