CEO Compensation, Excessive or Deserved?

Is CEO compensation or pay excessive, or is it simply the ultimate accomplishment for the modern day alpha male (and female).

Why do we chastise the corporate chief, when all he has done is accomplished the top achievement along the same scale we all seek progression upon? Each and every one of us pounds the table during our biannual employment review. We remind our bosses of our accomplishments and our hard work, and defend ourselves against unwarranted criticism or misunderstanding. We do all this in hope of attaining higher standing within our firm and greater compensation while we're at it. So, why then do we go on a witch-hunt to take down the greatest achievers of all?

Two videos concerning excessive CEO compensation follow below. We think they're worth your while to see, so please visit our website (Wall Street Greek) if the player does not appear here via the medium your using.



The Facts

CEOs make a whole lot more than anybody else, and significantly more than the average employee at most firms. The median CEO pay package in America amounts to about $8.4 million, and that's up $280,000 from 2006. As you might imagine, this positions CEOs as quite the outlier from Joe Average. The median income for an entire American household was $48,201 in 2006.

It gets even worse at the top. The ten best paid corporate bosses made over half a billion dollars last year. John Thain alone made $83 million. Thain, of course, is the relatively new CEO of Merrill Lynch (NYSE: MER), hired away from the NYSE Euronext (NYSE: NYX) in 2007. The point is, that's no small bit of scratch, especially not for a company that lost $8 billion last year.

The study discussed within the video found that stock price action and profit performance often played little or no role in CEO compensation. Clearly, some significant portion of a CEO's income should be tied to shareholder value creation. While Thain should not be held responsible for Merrill's '07 performance, since he came in to resurrect the firm, the same can not be said of some home builder CEOs who have somehow held on to their jobs despite their firms' struggles. KB Home (NYSE: KBH) CEO Jeffrey Mezger, for instance, saw his company lose about 929 million under his watch in FY 07 (Nov.), and he witnessed his stock sink some 57% (adjusted for dividends). It would seem he didn't feel too remorseful, or mindful of his shareholders' losses, while collecting his pay package, which was reportedly worth over $24 million.

So, the Witch-Hunt Seems Justified

The witch-hunt would seem justified, and we saw this play out on Capitol Hill over the past few months when big oil company executives came under especially heavy criticism. Their pay packages came up in the course of testimony, as did their companies' windfalls on high oil prices.

However, the windfall profit tax was killed by Republicans before all was said and done, and "The Greek" agrees that the special tax was unjustified and unfair. If you want to hedge against higher gasoline prices, just buy Exxon Mobil (NYSE: XOM) (actually choose a name without Mid-East assets) or the refiner stocks, which seem poised for a move higher, as we mentioned in a recent article.

When considering oil firm profits, we must remind readers that America did not tax Google (Nasdaq: GOOG) in any extraordinary fashion when their profits and stock price soared? Still, one might argue that unlike oil companies, Google's profits do not infringe upon the collective standard of living of the country. Still, "The Greek" says don't penalize firms for doing what they are suppose to do, and oil companies are not solely to blame for rocketing oil prices.

The Marketplace is Efficient / Our Suggestion

There's no better inspiration for these firms to invest in alternative energy than what we are seeing unfold now in the marketplace. Demand destruction due to critical price passage is becoming evident in consumer conservation and altered spending and living habits. These consumption level changes will drive companies to chase profits as capital flow leaves the petroleum-based sector. If you are still not happy with the level of R&D activity or the price of gasoline, offer these firms greater tax incentive for pursuing it.

But, Is One Man Worth That Much?

Even so, is one man ever worth $83 million dollars. After all, one man does not a company run. He's surrounded by a team of executives who all play their role. It is true though that the corporate organization is basically an empire with its Caesar CEO. However, it's also an empire that can be taken down by its senate, known in these times as the Board of Directors.

The problem is that all too often the Board of Directors is comprised of the CEO's best chums, the fellows from the club. Also, these same buddies may swap roles at other firms. Thus, the old "you rub my back and I'll rub yours" scam seems a real risk. For this reason, corporate governance has risen to prominence, especially since the Enron and Worldcom debacles. Now, we look for outside Director participation, and many investment rating firms assign companies corporate governance rankings while analyzing the shares. Still, no control is perfect, and the chums risk remains.

But, Seriously, Is One Man Worth That Much?

Suppose the controls were perfect, isn't it then a perversion of our society that allows one man to earn so much money based on the size of the firm he manages? After all, he is just one man, however qualified and responsibility burdened. Well, there may be some exceptions. A handful of managers seem to really set themselves apart. For instance, Warren Buffet seems to have done a decent job at Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK)... we think you would agree... but Warren's 6-year average total compensation through 2006 was just $100,000. Yet another reason to like Warren... I mean, does this guy get karma or what... Also, most General Electric (NYSE: GE) shareholders would argue that Jack Welch was worth every penny he took home.

Then there's the argument concerning others atop their field, for instance, Tiger Woods or Alex Rodriguez. However, the highest paid baseball player in history earned a total of $188 million over the entire course of his career through 2006, and that was Barry Bonds. Heck, Thain could make that much in three years time, and without steroids! Surely though, managing a company with the fate of so many employees and shareholders in your hands is significantly more stressful and important than hitting home runs, depending on who you ask. We also know that a baseball player's salary is market driven, not Board endorsed.

Maybe They Deserve it After All

What about the personal risk these top managers face. Legal pitfalls can befall even the honest guys when their underlings make serious enough mistakes. Corporate chiefs now have to sign off on the financial statements of their firms, making the job a riskier endeavor than it use to be back in the good old Enron days. Also, you're constantly under public scrutiny as a CEO, though never as much as the underpaid President of the United States. Still, I bet you would all take the hardship brought on by activist investors and critical bloggers any day for $83 million! Heck, I would do it for a cool mil.

Just the same, Countrywide Financial's (NYSE: CFC, NYSE: BAC) old founder and CEO Angelo Mozilo gave a whole lot of money back and turned all kinds of unnatural pale whilst he was under investigation. There's significant value to be assigned to unnaturally graying hair and the earning of sun-unrelated wrinkling. Trading years of your life away is worth the big bucks, isn't it?

Conclusion

While there are no doubt excesses that a few Boards need to be held accountable for, the median level of compensation, at $8.4 million, is likely well-deserved. The fate of so many in the hands of so few, the risks of legal pitfall and public scrutiny, and the cost of health and unnatural aging of one's life; these are a great weight to bear, and one must ask if any amount of money is worth loss of health. We live but one life here on earth, and every moment of every year is therefore precious and priceless. Any job that can turn a young man into old in four years is worthy a great sum of money. I say give the president a raise, while you cut Thain's pay.

There's something to be said about the rest of you also. I know you're out there dealing with the stress of an overbearing, hypocritical and clueless boss. I know too many of you are bearing impossible responsibility in your dark lifeless cubicles, and into the night while your children are reared by a nanny. I know your pain all too well, and you are worth every penny you earn. We'll never sell you short here, you can count on that.

Article interests AMEX: DIA, AMEX: SDS, AMEX: QLD, AMEX: DOG, AMEX: SDS, Nasdaq: QQQQ. Please see our disclosure at the Wall Street Greek website.