If there is a backlash against towering executive pay packages, you can’t tell it by what’s happening at Morgan Stanley or Boeing Co.
In recent weeks, the boards have handed out princely contracts to their incoming chief executives, complete with guaranteed pay and bonuses and outsized grants of restricted stock.
John Mack, the incoming CEO at Morgan Stanley, was given a “golden hello” worth an estimated $76.7 million. James McNerney Jr. is receiving more than $53 million for taking on the top job at Chicago-based aerospace manufacturer Boeing Co.
Getting pushed out can still mean a big payday, as Philip Purcell’s $110 million exit package from Morgan Stanley demonstrates. (See accompanying box.)
Maybe nothing should shock shareholders after Michael Eisner took home nearly $600 million in stock option profits from Walt Disney Co. in a single year as the last century was drawing to a close.
But investors, analysts and compensation experts still are capable of being outraged. They howled at the largess and guarantee features of the Morgan Stanley packages, in particular.
“A guaranteed bonus is an oxymoron,” said Paul Hodgson, a compensation expert with The Corporate Library. “We’re either basing pay on performance or we’re not. If we’re not, don’t call it a bonus.”
So why are board members still being so generous with shareholders’ money, and why aren’t they worried about a shareholder backlash?
Directors see themselves as friends of the CEOs, not adversaries, compensation critics say, and they often accede to outrageous pay demands because they want to avoid conflict. Reinforcing the alignment of their interest is the fact that most directors of large corporations are CEOs themselves.
Feeling his pain
In the case of Morgan Stanley, the directors felt Purcell’s pain at being pushed overboard, suggests Richard Bove, a brokerage analyst with Punk Ziegel & Co. in New York.
Morgan Stanley’s board was replete with Purcell supporters, many of whom knew him from his days heading brokerage Dean Witter when it was part of Sears, Roebuck and Co. and after it was spun off.
The board resisted calls for Purcell’s ouster for months, and only gave in when the departure of key executives and negative press coverage continued unabated.
Morgan Stanley’s board “hasn’t really embraced that change was necessary,” Bove said.
“They are as culpable as he is, so from their perspective they are as blameless as Purcell is. If Purcell was treated badly, they were treated badly. The fact is that personal loyalties are still No. 1 in this business.”
Once you’ve been generous with the guy being pushed out, it’s easy to be generous with the one you’re trying to woo, Bove adds.
Morgan Stanley drew particularly harsh criticism for its willingness to guarantee pay for Mack and several other top executives. Under his contract, Mack would have received $25 million in both 2005 and 2006 no matter how his firm performed. After a furor erupted, Mack gave up his pay guarantee.
In a statement, Morgan Stanley said it was trying to be fair with the agreements as well as “appropriate to the circumstances and consistent with past practice.” The firm also said it was trying to “ensure management stability through the CEO search process,” although it hardly got that.
Stephen Crawford, one of Morgan’s two co-presidents, resigned within days of receiving his guaranteed contract, allowing him to walk away with $32 million.
At Boeing, it was easy for directors to sympathize with McNerney because he was, in fact, one of them–a Boeing board member–and he already was a CEO.
To make up for what McNerney was leaving behind at 3M, Boeing gave him restricted shares worth an estimated $25.3 million. The company also guaranteed McNerney the maximum bonus allowed in 2005–230 percent of his base pay–which will top $4 million. Any bonus amounts he received from 3M will be subtracted from that, Boeing said.
Boeing says it is paying McNerney a reasonable amount given his experience and that the company didn’t offer him a signing bonus or any special inducements. His pay package is “in keeping with similar recent placements at other large U.S. companies and appropriately recognizes the value an executive like Jim McNerney brings to Boeing,” said Boeing spokesman John Dern.
When it comes to explaining the non-stop escalation in CEO pay, compensation experts point to several phenomena: the rise of the compensation consultant, the power of the comparison group and the role of the single candidate.
Compensation consultants work at the pleasure of the CEO, points out Graef Crystal, a former compensation consultant who is now a columnist for Bloomberg News.
Their jobs are to figure out how to shovel more money into executives’ pockets through incentive programs that consistently pay out, he says. And they’ve done an excellent job.
“I hate to call myself a whore, but I’ve turned a trick or two,” said Crystal. “Even back in the 1980s, I was making $800,000 to $900,000 a year. They didn’t care what you charged them. If you were going to get them an extra $10 million, they didn’t care because they didn’t pay the bill. The shareholders pay the bill.”
When a compensation consultant wants to bolster a CEO’s argument that he should be receiving more, he carefully selects a group of other CEOs that will be used for comparison.
Put a top-earner in the comparison group such as Terry Semel at Yahoo ($230.6 million in 2004 compensation) or George David at United Technologies ($88.7 million), and it is easy to argue that the current boss is seriously underpaid.
“They’re all looking at each other, and the pay just goes up and up,” said Crystal.
Also pumping up pay is the selection process where headhunters sift through a long list of potential candidates but present only one to the board, compensation experts say.
As board members become attached to the headhunter’s choice, they become less willing to dicker over the candidate’s pay demands.
What should happen, Crystal says, is for a headhunter to bring two or three candidates to the table and let the board evaluate their pay requirements.
`Leadership has value’
Not everyone agrees the system is broken and needs to be fixed.
James Drury, who runs his own executive search firm in Chicago, says that boards have to consider “market dynamics” when they are considering how much to pay a new chief. They can’t ignore what other companies are offering, particularly if they are trying to recruit a hot prospect.
“Leadership has value, and the market sets the value every day when a leader moves from one place to another,” Drury said.
If boards were parsimonious or bargained too hard, they might not be able to persuade top talent to come on board, he adds. “I can tell you from experience that if boards took a very aggressive approach … leaders would probably stay where they are.”
Of course, executive recruiters such as Drury have a vested interest in CEO pay levels continuing to rise, compensation critics point out. The fees charged by headhunters usually total one-third of the candidate’s first-year base pay and estimated bonus.
So is there any way to rein in executive compensation? Most experts don’t see one.
Small shareholders can complain, of course. But because they can’t vote directors out of office, there’s no way real way for them to punish boards they consider overly generous.
Institutional shareholders have more clout, but few of them have taken up the cudgel, Crystal said. The heads of large pension funds and mutual fund companies earn hefty salaries and bonuses themselves, which puts them in an awkward position when complaining about others’ take-home pay.
Some compensation critics simply are resigned to seeing more of the same.
“It hasn’t changed, and it never will change,” said Punk Ziegel’s Bove.
The Corporate Library’s Hodgson is slightly less cynical, but not much. He would be willing to celebrate if CEO pay would just “slow down a little.”
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schandler@tribune.com
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How warm is his handshake?
What John Mack, new CEO of Morgan Stanley, gets:
– Pay package: Guaranteed minimum of $25 million a year for 2005 and 2006*
– Stock: One-time grant of 500,000 restricted shares paid over five years. Estimated value: $26.7 million.
– Other: Vacation, pension, retirement plans and retiree health benefits will be treated as if Mack didn’t leave the company in 2001.
Total: At least $76.7 million for the first 18 months
What Morgan Stanley gets:
– A popular executive who may be able to quell the dissent that led to the defection of key rainmakers and a revolt by a group of eight former executives who called for the ouster of Philip Purcell.
*After signing his contract, Mack renounced his pay guarantee but is expected to make roughly the same amount based on the company’s past performance.
Source: Morgan Stanley 8-K filing with the SEC
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What color is his parachute?
What Philip Purcell, former CEO of Morgan Stanley, got:
– Bonus: $44 million. Will be adjusted according to the percentage increase or decrease in the company’s 2005 pre-tax earnings.
– Restricted stock: $34.7 million
– Stock options: $20.1 million
– Retirement: $11 million
– Other: $250,000 annual payment on the anniversary date of his termination; $250,000 charitable contribution in Purcell’s name; office and secretary. All continue for the rest of his life.
Total: $110 million
What Morgan Stanley got:
– Purcell agrees not to say bad things about his former employer. Purcell agrees to forfeit his bonus, annual payment, charitable contribution and secretarial services if he goes to work for a competitor.
Source: SEC filings and news reports
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How warm is his handshake?
What James McNerney, new CEO of Boeing Co., gets:
– Salary: $1.75 million a year; can be increased by board but not decreased.
– Bonus: $4 million guaranteed for 2005, minus amounts received from 3M Co.
– Buyout: $25.3 million in restricted Boeing shares to make up for unvested equity awards at 3M.
– Retirement: $22 million in a supplemental pension benefits.
– Other: Relocation benefits including the closing costs of selling his current residence and buying a Chicago home, grossed-up for taxes.
Total: more than $53 million
What Boeing got:
– An experienced CEO from 3M who lost out in the race to succeed Jack Welch at General Electric Co.
Source: SEC filing
