Last Friday morning, Rep. Henry Waxman's House Committee on Oversight and Government Reform held its second hearing on executive compensation, which featured the testimonies (and interrogation) of three American financial giants -- CEO of Countrywide Financial Corporation Angelo Mozilo, former CEO of Merrill Lynch E. Stanley O'Neal, and former CEO of Citigroup Charles Prince. The subject was major financial institutions' roles in the sub-prime mortgage mess. In his opening statement, Ranking Minority Member Tom Davis asked that the hearing not degenerate into a hunt for scapegoats, and then went on to make the bizarre remark, "Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual -- like an island tribe sacrificing a virgin to a grumbling volcano."
But scapegoats and virgins these three are not. Since CEOs are guaranteed outsized severance and separation packages regardless of how they or their firms actually perform, they can easily offload risk onto shareholders without enduring adverse personal consequences. When these executives are fired or elect to leave their company, shareholders can only idly stand by and watch hundreds of millions of dollars leave with them. Shareholders of Citigroup lost 45 percent of their investment value at the end of last year while Prince resigned, leaving with $40 million in severance pay. And when O'Neal announced his retirement just days after Merrill Lynch reported an $8.4 billion sub-prime mortgage-related write-down, he got more than $160 million in stock and retirement benefits, while shareholders had to grapple with losing 41 percent of their investment value. By the end of 2007, Mozilo (who plans to step down when Countrywide is acquired by Bank of America) received more than $102 million in compensation and $157 in exercised stock options. Total shareholder return over the same time period was negative 78 percent.
Supporters of such excessive CEO pay argue that it is driven by a highly competitive market to attract and retain top talent -- talent that would go to even higher paid positions in private equity or hedge funds if executive compensation were to lag behind. While CEO pay plans might initially attract talent, they also indicate to the talent that performance is not relevant. Such compensation programs need serious modification; for starters, they should be redesigned so that promised pay reverts back to the company in cases of bad behavior or performance. Shareholders should also have more of a say in responding to CEO pay packages approved by boards of directors. An example is the House's passed "say on pay" bill, which allows shareholders to approve or disapprove a company's executive compensation plans. Such steps are crucial in the context of increasingly global markets; if shareholders cannot find credible and responsible business leadership here in the United States, their capital will be sent somewhere else.
--Anabel Lee
