Risk Management and CEO Salaries

[kurt_cagle]

The role of Chief Executive Officer is an interesting one. They're the ultimate decision makers, responsible for the overall strategy of the company, they are the ones who are supposed to protect shareholder interests, they are the ones who are supposed to plan for the future. Of all roles in an organization, the CEO's is perhaps most important because his job is to chart a company through risks towards maximizing rewards - very much in the same way that a captain's role is to insure that a ship gets from point A to point B and accomplishes its primary mission - whether that be maneuvering a destroyer into a battle in order to take on an enemy (and getting out alive, hopefully) or insuring that the paying passengers on a cruise ship enjoy their experience.

This has been the basis for those high salaries, options, and perks. If a captain fails, worst case scenario, his ship goes down with him on it, but in most cases that captain will be fired without recompense and quite often will find himself in prison. Certainly, he will likely find himself financially ruined. Yet what we have developing now is that if a CEO fails, he will be given more money as a golden parachute than most people will see in their lifetimes, will typically continue being hired by other firms (maybe he will have learned enough to be useful to a competitor) and in many cases may even end up being called in on multi-million dollar "consulting" arrangements with the ones who let him go.

The events of this week have also proved that the CEO can even fail so badly that the corporation itself goes bankrupt without actually losing their jobs, because of course, now the Federal Government will step in an make good any losses. This means that the only thing that the CEO needs to do is look good on TV, know how to say "yes" when handed a multi-million dollar compensation check, and sit in his office and wait until the company tanks. Frankly it sounds to me like, as this is the model of being a CEO that George Bush himself knows, he just expected that this would be the logical way all of this would end up.

My own belief is that if the Democrats to end up holding all of Congress this time around, the first thing that they should address in this hideous pig in a poke that's been handed to them is a significant re-evaluation of C-level and Board governance, from compensation packages to tenures to responsibilities. Mismanagement is not necessarily fraud - more often than not it is incompetence rather than willful acts of malfeasance - but that should not make it any less risky to mismanage a company than to deliberately embezzle.

I'm also inclined to think that there should be some significant teeth to whatever this monstrosity is that's emerging over the last couple of days - if you as a CEO have to go to it to get rid of your garbage funds, then your own pay package beyond your immediate salary goes into abeyance until such time as the assets are purchased back. As most CEOs salaries for these mega-corporations have been deliberately kept low in order to avoid previous governance issues such as taxation, then maybe it will force the people who make the bad decisions (or who let the bad decisions be made under their watch) to understand just how much of an impact it is to actually live like the "little people".

Prison? Frankly its a non-issue anymore. You throw someone in prison for failing as a CEO when it is politically expedient to do so, but for the most part these are show trials, nothing more.

One last point - a lot of companies make noise about how if you do not offer the high salaries that you won't attract the best candidates. This is a smokescreen of course - within any organization there are usually people who understand the business very well who could easily take on the role, just as there are many entrepeneurs out there who have a far better chance of running a larger company even without the grossly inflated salaries. Indeed, I think that a company is probably likely to be far better served by someone who wants to get the chance to improve the company than someone who won't even think about it if the pay package isn't in the upper eight figures.