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Stratagem
 
INTERNATIONAL : EXECUTIVE COMPENSATION: ONE DOLLAR CEOS
One Dollar CEOs!
What is it About a One Dollar an Year Compensation that Attracts some of The Most Powerful CEOs in Corporate America? Unfortunately, The Answer isn’t what it is Perceived to be.
Issue Date - 21/07/2011
 
In a mad sprint towards the mirage of creating just about everything out of nothing, the US financial system managed to pull off a crisis, which cost the world more than $2 trillion in loses. The value of these losses keeps changing for the worse every month as more homes come under foreclosures and financial institutions around the world write down their holdings based on subprime assets. But what doesn’t change is the audacious phenomenon of hefty pay cheques that investment bank CEOs continue to take home. According to a research commissioned by The Wall Street Journal, total compensation of publicly listed Wall Street banks grew by 5.7% to hit a record $135 billion in 2010. Unfortunately, regulators and watchdogs are still quite listless.

During an interview, David McCormic, who was the Under Secretary of the Treasury to the Bush Administration went on record stating that he “would not support legal controls over executive pay”. As amusing as it may sound, Scott Talbott, Chief Lobbyist, Financial Services Roundtable, is comfortable with the level of compensation in the financial service industry because he believes that “Wall Street has earned it!” Availability of extensive literature on the subject doesn’t help disguise the disconcerting reality either – executive compensation continues to be one of the most debated and hallowed corporate issues in these contemporary times.

CEOs themselves need to realise the negative fallouts of an unjustifiably huge package on their performance and consequently on their careers ahead – a fact proven by various studies. A research undertaken by Graef Crystal in 2009 (a veteran in executive compensation consulting) shows that “there is no relationship between CEO compensation and shareholder returns”. In December 2009, three professors at the University of Utah and Purdue University commissioned a study titled Performance for pay? The relationship between CEO incentive compensation & stock price performance. The report analysed all NYSE, AMEX and NASDAQ firms listed on the Compustat Execucomp Database and Compustat Annual Industrial files from 1994-2006 and concluded that “industry and size adjusted CEO pay is negatively related to future shareholder wealth changes.” They proved that firms that overpay their CEOs earn negative abnormal returns over a five year period.

 
Amidst all the hue and cry over why these CEOs need to be paid so much, there are some top honchos who settle down for a mere dollar as their fixed annual compensation and are also referred to as one dollar CEOs. At hindsight, that comes across as the ultimate benchmark on accountability, commitment and sincerity. But on closer examination, matters are not really what they seem to be.

In 1978, Lee Iacocca (yes, the Iacocca who was kicked out by Henry Ford) was appointed as the CEO of Chrysler at a base salary of $360,000 per annum. In September 1979, the board decided to reduce salaries of bonus eligible executives by 10% for the next two years. The deducted amount would be converted into free shares of restricted stock and delivered two years later. However, citing concerns over the company’s financial health, Iacocca proposed that his salary be reduced to $1. He became a symbol of modern capitalism overnight but what went unnoticed was the fact that $359,999 (the salary cut) was converted into free shares. By the end of 1987, Iacocca had exercised stock options worth $43 million and was unwilling to part with the system irrespective of the company’s strong financial position.

On the face of it, the one dollar salary seems to be an act of unmitigated self promotion. But dig a little deeper and you’ll realise that there’s more to this than meets the eye. Take Apple’s Steve Jobs for instance. He rejoined the company in 1997 at a salary of $1. In January 2000, he was awarded the largest stock grant ever in business history (40 million split adjusted shares). But the dotcom bust made the options almost irrelevant. In 2001, the board issued an additional 15 million shares, but the shares further slid. In 2003, Jobs voluntarily surrendered all 55 million shares. The company disclosed in its proxy statement later that year that surrendered shares were compensated in the form of 10 million split adjusted shares. A derivative of the Black Scholes model was used in valuations, which made the shares worth $75 million. When the sale restriction lapsed in 2006, they were worth $640 million!

In 2009, Corporate Library (a US based research firm) came out with a report titled 2009 Proxy Seasons Foresights #7: The one dollar base salary which examined 18 CEOs who had served without salary in 2008. According to the Greg Ruel, Research Associate, Corporate Library “these CEOs had a combined total of almost $6 billion in stock of the companies at which they are employed, which leads us to conclude that voluntary forfeiture of salary and cash bonus is largely symbolic”. Confirming this doctrine is a research paper by Professors G. Loureiro, A. Makhija and D. Zhang christened Why do some CEOs work for one dollar salary? The authors studied 50 CEOs with $1 salary between 1992 and 2005, and found that “Shareholders of firms with $1 salary CEO salaries do not fare well in the aftermath of these adoptions. $1 salaries are a ruse hiding the rent seeking pursuits of CEOs who adopt these pay schemes.”

So what does this all prove? To begin with, it’s an indication that US regulatory bodies have an extremely weak stance on executive compensation. The recently introduced Dodd Frank Act does lay down provisions to introduce advisory “say on pay” voting by shareholders. But as the case with Steve Jobs demonstrates, that won’t really help. Shareholders must actively lobby for a system that scraps stock based compensation and links CEO performance and compensation to variables under his control which influence stock prices; so that the next time when a Larry Ellison proposes a reduction in salary to one dollar, we know that it’s a genuine step in the direction of shareholder wealth maximisation, and not a fulfilment of narrow personal goals to gain more shareholding within the company.

Amir Moin           

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