CEO Pay: The Steroids Era


The congressional hearing on executive compensation featured another class of superstars accused of bulking up at the expense of the average American

It's been quite a season for the grilling of superstars on Capitol Hill. Not long ago we witnessed the allegedly steroidal hurler Roger Clemens and the soap opera of his friendship with a big witness for the prosecution. Now we've had a chance to thrill to the drama of the celebrity czars of the stumbling subprime mortgage empires, financial executives E. Stanley O'Neal, Charles Prince III, and Angelo Mozilo.

Perhaps not since Nov. 8, 2005, when dark-suited CEOs of the top three oil companies swore their oaths and attempted to defend themselves against the high-octane grandstanding of accusatory congressmen, has the nation seen such an episode of class and partisan warfare, Washington-style.

Back then, it was a mere confluence of high energy prices and record industry profits—records that happen to have been broken again and again, of course. But now a veritable economic storm of factors and forces during a Presidential election year have coincided to produce one of the most precarious moments for a richly rewarded CEO to defend his company and his compensation.

And for good reason, it would appear: The trio of executives who faced grilling before the House Oversight & Government Reform Committee on Mar. 7—in a room full of bankers and financial sector lobbyists—got stratospheric paydays during the subprime mortgage boom. Yes, that very same boom that has busted out all over, leading, as it happens, to the multibillion-dollar degradation of their own formerly ultraperforming financial giants, Merrill Lynch (MER), Citigroup (C), and Countrywide Financial (CFC).

But what really makes them prime candidates for Washington-brand scapegoating and symbolism-shaping is their companies' central role in a marketing and greed-induced fiasco that has cost thousands of borrowers their homes and sent whole economies spinning.

"A Different Set of Rules"

To be sure, congressional hearings are notorious Star Chambers that only vaguely resemble courts of law. There are no rules of evidence, and the chairman is always right. The ancient Hebrews led the first (scape) goats out into the desert and let them die; U.S. politicians haul them into a hearing room. There's good reason why witnesses preparing for testimony hire the best lawyers and public-relations consultants money can buy. Sometimes it's hard not to pity even the dodgiest of them against the bombastic force of a politician who only seems to be asking questions, not seeking answers.

But the situation now—in which the widening gap between two classes at the nation's extremes is being brought into sharper focus by the forces of economic reality and combative Presidential politics—would challenge even the most sensational crisis PR pro. And it sure makes it difficult to feel sorry for unimaginably wealthy captains of finance to rake in extra tens of millions when they did such a poor job. Do you know any middle-level manager at your company's sales department who lost tons of the company's money and then got a fantasy severance package?

Such hearings are always predictably partisan. In this instance Republicans on the House Oversight & Government Reform Committee railed against a "witch hunt" for "bad guys" on whom to blame the nation's economic downturn. Democrats, meanwhile, seized the moment as an opportunity to home in on bonuses, stock sales, and other compensation as a sign of the excesses of corporations, particularly in favor of the denizens of corporate suites.

Hardly a new story line. But what makes it fresh politics are the daily reminders that average Americans are confronting shrinking job opportunities, home values, and stock portfolios, while the corporate billionaires cruise on. Chances are you didn't do this well in 2007: $120 million for Countrywide's Mozilo, a $161 million retirement package for former Merrill Lynch CEO O'Neal, and $39.5 million in stock, options, perks, and bonus for Citigroup's former boss Prince. And that's despite their companies losing more than $20 billion on investments in subprime and other risky mortgages during the final two quarters of last year.

"There seem to be two economic realities operating in our country today," said the House committee's chairman, Henry Waxman (D-Calif.). "Most Americans live in a world where economic security is precarious and there are real economic consequences for failure. But our nation's top executives seem to live by a different set of rules."

Corporate compensation committee members also took the stand, as it were, on Mar. 7. Asked why Merrill allowed O'Neal to retire and keep his $131 million in stock and options—rather than be sacked—the chairman of the firm's compensation committee, John Finnegan, said the board lacked cause. Lost the ship loads of money, exercised bad judgment, took risks? Some people think so. But unethical behavior? None of that, said Finnegan.

All Upside, No Downside

When was the last time something like that happened to the money-losing risk-taker in your sales department? Waxman appeared shocked, just shocked, that a compensation committee might lack a way of punishing an executive whose company suffered so. "To say you don't have the tools, it means that even if someone performs badly, there are no consequences," Waxman said.

As it happens, those same compensation committees, together with full corporate boards, may have contributed to the mortgage boom and financial bust by encouraging their celebrity CEOs to take risks so they could make even bigger numbers. (In a way, that's not a huge analogous gap from the superstar baseball player who—while official baseball authorities look the other way for years—takes the risk he considers necessary to perform at the top of his game, to make his numbers.)

The corporate sluggers dived headlong into places where they might make a big sum quickly, underwriting and repackaging subprime mortgages. The thing is, of course, when you lose this game, you lose lots of money.

Unless, of course, you're one of the lucky top dogs.

Amid the heated rhetoric and clouds of class warfare swirling in the congressional chamber on Mar. 7, one witness stood out for her calm, commonsense observation: Nell Minow, editor of the independent research firm Corporate Library and a longtime critic of corporate compensation and other governance practices. Noted Minow: "If you make compensation all upside and no downside, that will affect the executive's assessment of risk. It will make it clear to him that he can easily off-load the risk onto shareholders. It's heads they win, tails we lose."

Many Americans right now are having trouble seeing the upside for themselves. Investors, too, have reason to wonder how corporations will recover from this era of juiced-up performance and executive pay.


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