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E-MailHere is a response to Professor Kaplan’s comments on the recent New York Times article about private equity funds. While it’s true that some private equity funds are luring sitting CEOs with higher pay, I think it’s far from a widespread trend. There are about 14,000 sitting CEOs today; maybe a dozen have been lured away, if that.
And since the terms of the pay arrangements given to privately held CEOs are not publicly available, we don’t really know what those arrangements consist of. Will private owners continue to pay for poor corporate performance? Will they pay out a huge severance package–or any severance–to a fired CEO? I doubt that private owners would follow the lead of so many public companies in these criticized areas.
But more importantly, we must remember the difference between CEOs of private companies and public companies. Private owners are free to pay someone as much as they want; it’s their money. In the public company context, the board of directors have their fiduciary duties to consider when paying someone and appropriate processes must be used. Unfortunately, the processes followed today often are broken – and have been for some time.
In this “Open Letter to All Journalists,” I try to explain how board processes for setting CEO pay levels can be improved. For example, can you believe that boards didn’t consider the total amount already committed to be paid to a CEO before layering on more compensation as recently as three years ago? On CompensationStandards.com, we coined the term “tally sheet” in 2004 when we started pushing boards to begin consulting spreadsheets before adding/changing an element of a CEO’s pay package.
I continue to get too many confidential emails from board advisors describing naive–and uninformed–acts by directors to buy into the notion that CEOs are underpaid. Many processes continue to be broken and even when the processes are repaired, boards have not yet addressed the excesses created by more than a decade of bad practices. This is all common sense: if we pay a highly paid CEO even more, will shareholders get better performance? I think the millions most CEOs already receive should be incentive enough.
One Comment
Sir, you imply that “excessive” CEO pay is often a result of boards naivete.
I am a tad more cynical than you. I believe much of this is driven by personal avarice on the part of board members. There are many ways that one hand can wash the other. Direct dealmaking of the “you vote for mine and I’ll vote for yours” type of thing need not be a part of it. Many things are accomplished through unspoken understandings, of the “we all know that this is how things get done” type. It used to be called a New York deal; something for you, something for me and who cares about the guy that’s not here? (in this case the shareholder)
I wish I had confidence that the types of measures you mentioned would affect things. But it’s hard to talk people out of lining their pockets.