Top executives keep getting increases by using methods that have become common practice in Corporate America. They get their boards of directors to give and give and give. How do they do it?
The executive compensation committee of the board and/or the VP or Director of Executive Compensation (a fast growing occupation) review market data of energy peers at the 25th, 50th and 75th percentile for annual cash compensation, bonuses, long-term incentive compensation, and perks. Of course these boards and compensation executives also hire outside consultants, who are paid handsomely to help out by also benchmarking and conducting competitive assessments. So as one CEO's compensation goes up, other CEO's in the same industry demand that their compensation must go up and then another and another. This is what has happened in the energy industry.
In many cases the CEO hires the compensation consultants and compensation executives who serve at the pleasure of the CEO so the deck is stacked in the CEOs favor. When the CEO also holds the title Chairman of the Board, Like Mr. Klappa of We Energies, the compensation game is completely tilted. It's a game of envy and "gimme more" that gets played out annually and Directors of Boards go along for several reasons.
Business in America has changed considerable over the years. Fifty years ago businesses were primarily in manufacturing processes and twenty five years ago the primary business growth was in technology and now its financial services. While the nature of business has shifted the composition of boards have remained the same. Also the complexity of understanding the strategy and executive decision making has significantly changed. Now CEO's surround themselves with CIO's, CFO's, IT Officers, Six Sigma experts, "quants", and other "numbers crunchers", who provide "bottom line" services. They also hire consultants who provide the mathematical models to assist CEO's in making their "bottom line" decisions. In addition, they hire coaches, consultants, and public relations to help them engage in the work of self-promotion and self confidence. Given the complexity of running a financial service business most board directors sit in the dark.
While Enron executives were cooking the books Robert Jaedicke was Chairman of the Enron Audit and Compliance Committee from 1985 to 2001. Jaedicke is Dean Emeritus of the Stanford Business School and a former accounting professor. Trying to understand the inner workings of a corporation is a daunting task for a part time board director. Even an accounting professor could not get his arms around the complexities.
In addition, trying to be a responsible board director is especially problematic if one holds other positions or serves on several boards or even holds a full time position. When Bob Nardelli served as the CEO of Home Depot he also served on the Board of Directors of Pepsi.
To make matters worse board directors use their positions to feather their own bed. There is no better example of board incompetence and lack of responsibility and unethical behavior than the Enron board. CEO magazine, selected Enron's board as one of the top five corporate boards in America, this was before the collapse and discovery that Enron's board like most boards engaged in little or no oversight. A U.S. Senate investigation found that the 13 member board of directors was intertwined with conflicts of interest and engaged in off the books financial arrangements. It was not only Enron's board that was asleep at the wheel but also the boards of scandalous corporations like WorldCom, Adelphia, Refco, Lehman, Tyco, ImClone, Martha Stewart Ominmedia, and HealthSouth. The ethical transgressions ranged from individual lapses of judgment to defective corporate cultures and involved embezzlement, insider trading, and financial statement falsification (Fombrun & Foss, 2004; Smith & Walter, 2006).
People who serve on boards are supposed to be held responsible for overseeing their companies, but they are rarely accountable. Even if the company fails board directors jump from board to board. The Senate Commission to investigate the collapse of Enron concluded: "Board membership is no longer just a reward for "making it' in corporate America; being a director today requires the appropriate attitude and capabilities, and it demands time and attention." This statement made in 2002 has not been heeded and boards are run the way they have always been and directors are selected they way they have always been selected, from an interlocking corporate community of power elites. Take for example Thomas Gerrity the former Dean of Wharton Business School. He was a board director at Fannie Mae the loan giant when it took on enormous risks and accounting irregularities and was seized by the government in September 2009 and contributed to the financial crisis of 2008. But nothing has changed for Gerrity he serves on several boards. According to Forbes (2011) Gerrity has served on the following boards: ICG since December 1998; PharMerica Corporation since 2007; Sunoco, from 1990 to 2010; Hercules, from 2003 to 2008; CVS Corporation from 1995 to 2007; Federal National Mortgage Association from 1991 to 2006; Knight-Ridder from 1998 to 2006.
Many Corporate Board Directors see their job as an easy way to makes lots of money. This is certainly true for Gerrity, from 2006 to 2010 his total compensation for serving on boards was over $2 million. Directors may be given upwards of $100,000 to attend a board meeting and can receive in excess of a $1 million in pay and stocks for serving. The median salary for these directors of corporate boards is $200,000 for a few hours of work per week. If one sits in several boards one can easily earn between $500,000 to over a $1 million. Many call it the world's best part time gig and retired CEOs and professors from elite MBA programs can live a comfortable life style serving on a few boards.
In addition, many board directors are: members of the founder's family, some are senior citizens who rarely attend meetings.
Gross mismanagement on the part of the board occurs when the board allows a CEO to be the chair of the board. This has the potential of putting the fox in the hen house. Often this is done to allow board directors to do business with the company creating massive conflicts of interests. When a board engages in questionable practices to enrich themselves they contribute to creating a culture where greed is permissible and even encouraged. This creates a culture where executives see their main activity as the attainment of personal wealth.
Celebrity board members
Retired wealthy executives who have attained celebrity status in the business world are in hot demand to serve on boards. So are highly visible Africa-Americans: Vernon Jordan sat on six boards, and if you're an African-American ex-football player you are really in demand; Willie Davis sat on nine (Domhoff, 2005). CEO's love people like Ken Langone or Jack Welch on their boards, they are publicly stated believers that CEO's should be paid very well. Having a celebrity CEO on the board not only increases the likelihood the CEO will be well compensation, but also the CEO will become a celebrity themselves. CEOs also love to have deans from their alma maters on their board especially business school deans. Boards have been known to have executive recruiters on their boards.
These head hunters not only recruit executives but also board members.
CEOs want friends, colleagues and those who will be agreeable especially when it comes to compensation matters. Consider what Kathy Noland says, she is the vice president of the board of directors and CEO at B.E. Smith, a head hunter firm for hospital executives. She wants hospitals to guarantee high pay and large severance packages to let executives know they can make necessarily risky decisions without being penalized. She says: "The principle behind (high pay) is the board of directors wants the CEO to make prudent decisions for the mission and values of the organization," she goes on. "[The severance] package gives the CEO a confidence level to make those decisions. If for any reason they are terminated without cause, there is that extension of salary until they are engaged in their next employment" (Fields, 2011). What is she saying- use big pay to encourage risk with no penalty, and big pay packages with big severance packages will encourage confidence and if the CEO is fired and terminated the CEO will be taken care of. Health care CEOs love this even though her comments can clearly be considered self serving. It is people like Noland who are responsible for excessive health care CEO salaries but also their Senior VPs', VPs', and board members. For example, in 2007, the top 6 health plan boards paid themselves a whopping $277,998,793 (Jodell, 2009).