Should CEOs Fear Their Phones?

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Amid a recent spate of CEO changes at major companies, some goodbyes will be far fonder than others. Bidding farewell to Apple's (NAS: AAPL) Steve Jobs and Costco's (NAS: COST) Jim Sinegal could be bittersweet for investors, since both bosses' decisions to step down nonetheless leave their companies strong and well-positioned to compete in the future. But Yahoo!'s (NAS: YHOO) ouster of CEO Carol Bartz is an entirely different story, fraught with high drama and decidedly NSFW language.

The cuss jar overfloweth
Bartz's profanity-laced diatribe about Yahoo!'s board's decision to fire her by telephone makes titillating headlines. But given the disparity between their pay and performance, many of corporate America's CEOs might want to think twice before picking up their own phones these days.

Bartz has a reputation as a particularly well-compensated U.S. CEO. She scored high last November in a Wall Street Journal profile three of handsomely paid chief executives. Although much of her $44.6 million in 2009 compensation was tied to stock options and restricted stock grants, she received nearly $1 million in straight-up base salary that year.

That money went to a brand-new CEO who had proven nothing at Yahoo! when the employment agreement was drawn up. (A Foolish poll last November revealed that 42% of readers believed Bartz was the most overpaid CEO, amid a list of formidable contenders including Oracle's (NAS: ORCL) Larry Ellison and Occidental Petroleum's (NYS: OXY) Ray Irani.)

Let's give Bartz credit where it's due: She requested that she not receive a base salary increase in 2010. Her total compensation also ended up being a lot lower than it was during her first year on the job, at about $12 million.

Even though Bartz's tenure at Yahoo! isn't considered a success, she could receive a massive golden parachute. If it matches the terms of her original employment agreement, her payout will likely total around $10.4 million in cash and stock.

However, observers now wonder whether Bartz's spectacularly profane comments in her first post-firing interview with Fortune magazine -- "These people [bleeped] me over," she now-infamously said -- will endanger that handsome severance package. Dropping the f-bomb to a major business magazine, and referring to the board as "doofuses," could violate the anti-disparagement clause in her agreement.

911, this is an emergency
The financial incentives Yahoo!'s board lined up when it brought Bartz onboard haven't led to any real improvement for the company and its investors.

Since January 2009, Yahoo!'s stock has hardly budged. On an operational level, the company's weak. In 2009, total sales fell 10.4%, and they dipped 2.1% in 2010. Things haven't improved this year; in the 12 months that ended June 30, Yahoo!'s sales have fallen 14.4%.

Granted, Yahoo!'s been increasing profits and boosting margins, but flagging sales indicate an unhealthy core business. It faces serious competition from the Internet's eyeball-drawing rivals, including Google (NAS: GOOG) , AOL (NYS: AOL) , and Facebook.

Yahoo!'s board's not out of the woods yet, either. Bartz has indicated a desire to stay on as a director. (Awkward!) She also claims that the board's trying to save face after having refused a Microsoft (NAS: MSFT) deal before she took the helm. At least one major investor now says it wants Yahoo!'s board replaced.

Talk about cold calls
Again, to be fair, corporate governance experts GMIRatings point out that much of Bartz's "golden hello" stock options had difficult targets attached, and that her cash severance is actually modest according to general American standards. The group also points out several positive elements of Yahoo!'s board, including its truly independent chairman.

Regardless, this situation should reminding investors that corporate boards hold the keys to CEO pay. Too often, chief executives get way too much credit for their assumed merit, however much that perception may differ from reality. Rather than getting distracted by Bartz's colorful comments, we investors should focus on howe well boards monitor CEO compensation and performance.

Bartz allegedly accused Yahoo! chairman Roy Bostock of lacking certain, uh, manly accoutrements when she began to suspect he was firing her via a lawyer-approved script. But regardless of Yahoo!'s board's past mistakes, letting Bartz go was the right thing to do in the face of the company's continued competitive malaise.

The firing may not have been artful, but it can't be easy for boards to discipline, disappoint, or even fire a chief executive who probably feels like a close business associate, if not a friend. Directors are supposed to look out for shareholders, and resist buddying up to management. But that's often easier said than done, especially when business gets tough.

I can only hope that more boards metaphorically "man up" -- in a gender-neutral sense, anyway -- and make sure that their chief executives deliver real performance in exchange for their handsome pay. Shareholders should expect nothing less. Let's hope that in the wake of Bartz's firing, ringing phones make more mediocre, performance-challenged CEOs a wee bit nervous.

Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.


At the time this article was published

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