Caterpillar, which is headquartered in Peoria and has operations in the Chicagoland area, recently revealed that its CEO, Jim Owens, received 54% less in compensation in 2009 than in 2008. That seems like a pretty steep drop, but of course you have to put it in perspective, which includes:
Mr. Owens’ 2008 compensation was $14.6 million, so for 2009 it fell to a not-so-paltry $6.8 million
There are other perks, including the value of his pension, that aren’t included in the summation
Caterpillar missed its Board-set earning targets by a wide margin …
… but because the Board thought Mr. Owens did such a good job dealing with the “Great Recession” (and he may have), it gave him stock options and restricted stock grants worth about $4M (part of the $6.8 total), which they didn’t technically “have” to do
So, was the Board worried that Mr. Owens would jump off the bulldozer, so to speak, if he didn’t receive a large effectual bonus? Perhaps. And maybe part of the reason we overpay so much for CEO’s is that we fall into the same risk trap that many sports franchises often blunder into. Your team didn’t meet its goals, so how do you improve? Do you focus on how to make who you have better, or do you see greener grass out there and see an easy fix by paying big bucks for a talented free agent in a salary competition with other teams that sometimes borders on the insane?
It’s hard to make the right call, no doubt about it. There are some great success stories out there of new leaders being brought in and leading dramatic turnarounds. Which also means that if a Board thinks it has a good leader, it has to protect against the teams with lots of salary cap space who can swoop in and steal him or her. Hence the praise and very expensive flowers showered upon Mr. Owens.
Part of the issue, too, is that we are a relatively trusting society, which makes it easier for a CEO to convince a Board of Directors that while the goals haven’t been met, the external factors that prevented the achievement of the goals have been impressively mitigated, i.e., if not for the CEO’s leadership, things would have been much worse. We are easily swayed by impressively-prepared arguments, whether or not they have true merit (and perhaps Mr. Owens’ did).
And then there’s the accountability – and quality – of Boards themselves, which is something that Warren Buffet likes to talk about. There is a serious lack of consistency with regards to the quality of Boards of Directors. Some Boards are active, involved, and highly capable, and they require real accountability from their CEO’s. Others are just rubber-stampers that dress themselves in the trappings of a real Board, populated in some cases with people who really aren’t that qualified and sometimes frankly don’t care a lot. Show up to a meeting once every two months or once a quarter, sit through a meeting, approve what the CEO (who is also the Chairman in many cases still) proposes, and go to dinner? Yep, I can do that.
So what’s the answer? Are we forever going to act, on balance, so lavishly with regards to executive compensation? Should government somehow get more involved, which then adds another layer of complexity and potential corruption? Can’t we just tell people to be more honest and less greedy?
Yeah, right. The answer to the CEO compensation conundrum is a bedeviling one, for sure. Anyone have any brilliant ideas?