01:00 AM EDT on Sunday, July 24, 2005
Providence Journal
BERKELEY, Calif.
WANT TO MAKE a hundred million dollars quick? Be such an awful CEO that a faction of your own managers revolts and wages a public campaign against you, complaining how you have driven the company stock price into the tank with a conspicuous lack of leadership, strategy and vision.
Let them force you out. Then collect your previously agreed-upon $113-million retirement package, and don't let the door catch you on your way out.
Such appears to be the story of Phillip Purcell, the dethroned Morgan Stanley CEO who is the latest tragic anti-hero in the ongoing public saga of brash executives who get paid the kind of money that we normal folks would take several thousand years to earn at our current jobs.
Even in an era when American CEOs regularly earn 300, 400, even 500 times what the average company employee earns, Purcell stands out -- not just for his outrageous compensation package, but also for the fact that, by all accounts, he was at best a mediocre CEO. So much for pay for performance.
Equally extraordinary is the boon that former Morgan Stanley Co-President Stephen S. Crawford will enjoy from being in the right place at the right time. Just 3 1/2 months ago, Crawford was rewarded for his loyalty to Purcell by being promoted to co-president.
Now, Crawford is being rewarded for his loyalty to Purcell with a $32 million golden parachute. So much for pay for performance.
So what explains these outrageous pay packages, so completely disengaged from performance that they must be in a separate galaxy entirely? A Morgan Stanley spokesman explained that Purcell's compensation was "fair, appropriate to the circumstances, and consistent with past practice."
As for Crawford's compensation, Morgan Stanley's lead director, Miles L. Marsh, insisted that "I don't think that Steve's compensation is out of the norm. It was an increase, but there was also an increase in responsibility."
Fair? Appropriate? Not out of the norm?
True, executive compensation is sky-high all across Wall Street and much of the rest of America, but it's not that high. The real answer lies in the corporate governance of Morgan Stanley. Or rather the lack thereof.
Purcell got so much money despite his stunning mediocrity as a CEO because he packed the board of directors with his friends and got rid of his enemies. No wonder they gave him an exit bonus of $42.7 million, plus $34.7 million of restricted stock, plus $20.1 million of stock options, plus a lump-sump of retirement benefits worth $11 million, plus medical benefits and $250,000 a year for the rest of his life. Sure helps to have friends in the right places.
But while Morgan Stanley may be an egregious example, it is just an exaggerated case of what continues to take place at America's largest companies. Thanks to a great extent to complicit boards, average executive pay rose from $8.3 million in 2003 to $9.6 million in 2004 (a 15 percent increase), says Business Week's annual executive-pay survey.
Average workers, meanwhile, saw their pay rise by only 2.9 percent, to $33,176 a year. And no wonder. At roughly three-quarters of U.S. companies, the CEO is also the chairman of the board of directors. It is usually the CEO who decides who gets nominated for the board and who stays on it. And as it turns out, not challenging multimillion-dollar CEO compensation packages appears to be a good way to keep their jobs as corporate directors -- which average $200,000 a year.
Additionally, many directors are also top executives or retired CEOs themselves, so they can sympathize with the importance of needing enough money to buy that $6,000 gold shower curtain.
Meanwhile, the mass of shareholders, the actual owners of the company, don't have much of a say. Though shareholders do technically get to select the directors at the annual meeting, they rarely get that supposed hallmark of free-market capitalism -- choice. Almost all corporate board elections are run Soviet-style -- one slate of director candidates, chosen by management, for management.
Shareholders who want to nominate their own directors face an expensive and difficult campaign, because management controls access to corporate proxy statements. Accordingly, one way to curtail runaway executive compensation would be to make directors accountable to shareholders -- of all things! Make it easier for shareholders to nominate candidates to the board by giving them access to the proxy statement, as former Securities and Exchange Commission Chairman William Donaldson originally proposed two years ago.
Then, if shareholders think that, say, a $113 million pay package is unreasonable, they can vote the directors who supported it out of office.
Unfortunately, the U.S. Chamber of Commerce and Business Roundtable have successfully blocked this proposal, and with Donaldson now gone and pro-business ideologue Rep. Christopher Cox (R.-Calif.) his replacement, such a reform seems unlikely. (Institutional investors, however, are trying to open up director elections on a case-by-case basis through shareholder resolutions, with mixed success).
Another Donaldson-suggested reform -- requiring companies to clearly and transparently disclose their executive pay packages -- also stands little chance of becoming law under a Cox-led SEC. Which is a shame, because the unfortunate truth is that many CEOs are now smart enough to hide their compensation in a million places on the company's financial statements (a perk here, a perk there), making it hard to know what they are getting.
Capitalism always works best when it is infused with accountability and transparency, as opposed to cronyism and obfuscation. And when it comes to runaway executive pay, a little dose of accountability and transparency would go a long way toward making capitalism work a heck of a lot better for just about everyone.
Lee Drutman, a frequent contributor, is the co-author of The People's Business: Controlling Corporations and Restoring Democracy (Berrett-Koehler, 2004).
http://www.projo.com/opinion/contributors/content/projo_20050724_24lee.31c7ec0.html
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