Pay for performance vs. pay for failure, as CEOs paid millions to lose billions
In 2008, we put a big exclamation mark on what I hope is the end of an eight-year sentence of stabbing common shareholders in the back. Of the 10 highest paid CEOs, here are the four who destroyed the most stock market value while getting well above average pay. The companies are listed in descending order of the percentage destruction in stock market value, along with the CEO's 2008 compensation and loss in stock market capitalization:
- Citigroup (C) paid CEO Vikram Pandit $38.2 million while its stock fell 78 percent, destroying $124 billion in stock market value
- Motorola (MOT) CEO Sanjay Jha made $104 million while overseeing a 75 percent stock plunge, which wiped out $27.9 billion in stock market value
- American Express (AXP) CEO Ken Chenault made $28.6 million while his company's stock fell 65 percent -- slashing $38.5 billion in shareholder value
- Ebay (EBAY) CEO John Donahoe got a cool $24.4 million as eBay stock lost 60 percent of its value, costing shareholders $26 billion
To be fair, two of these companies actually made a profit -- in 2008 American Express earned $2.7 billion and eBay made $1.8 billion. But the CEOs who got the higher pay worked for big money losers -- Citi lost $27.7 billion and Motorola's net loss was $4.2 billion.
It's hard to see how investors can be encouraged to invest in common shares as long as the directors -- whose CEOs serve on each others' compensation committees -- are acting in their own self interest to boost their compensation regardless of stock market performance.
But CEOs are people and people will do what you pay them to do. If you pay for failure, CEOs will fail.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.