INTERVIEW with "Telephony Online" (USA)
Full Interview by Tim
McElligott, Senior Editor with
ART's Managing Director. Topic: Executive Compensation
and the Crisis of Investor Confidence
Q1. With executive compensation coming
under increased scrutiny after Enron, Worldcom, Global Crossing, etc,
what can be done to convince investors, shareholders and employees
that today's CEOs and other top execs are receiving fair and properly
motivated compensation?
A1: "I don't
think that companies that somehow 'accidentally misstated' billions of
dollars as profit should be compared to the thousands of companies
that are trying to do a good job within a crazy stock-based system.
There are nearly as many different compensation plans and pay formulas
as there are public corporations, but generally, the present system
all around has been pegged to short term vision and looking good in
the internet finance bulletin boards, rather than on running companies
of substance for the purpose of bringing long term value to investors.
"I do not know if I would want to
exert any effort to try to evangelize people that top executives are
receiving proper pay. There isn't some sort of CEO union that lays out
a uniform contract which all corporate boards must accept, but a lot
of CEO's at big companies have been acting as if there is such as
union, and that if the board doesn't pay crazy salaries (and obscene
benefits and stock options), then market gossip might think less of
the CEO and the stock might go out of fashion. The system has been so
twisted that their sales pitch seems to have been: 'If you offer a
completely crazy comp plan, the market might think that your new CEO
has got to be really something special.' The fact is that while you
and I might feel this behavior is abhorrent, this is the way the
system has been oriented for a decade or more. The CEO's who played
this game are in a sense only actors on a stage playing roles of 'high
power extravagant CEO's' before an audience that rooted them to act
that way. We know this, because the audience kept buying tickets
(stocks) to see the 'CEO Rock Star' show. No wonder that when a CEO
comes to town it's called a 'roadshow.' So while I dislike the greed of
many CEO's like this, I cannot sympathize with investors that egged
them on, that partied when their idols made them rich, and are
complaining only now, when the show is over and all their money is
gone. The only people I could sympathize with are ordinary corporate
employees whose pay, benefits or pensions were trapped by their
companies in order to feed the system.
"Some CEO's work tirelessly and are
vastly underpaid compared to their sincerity of efforts in bringing
value to shareholders, while others truly seem to be corporate
deadwood who have won the lottery without having any accomplishments
as CEO to show for themselves. This unfairness does not just apply to
the boardroom, it exists in every job category, in every office or
factory all over the world. I don't think that the big issue really is
executive pay, as much as how poorly some CEO's have been allowed to
mismanage their shareholders' property. I think that some noteworthy
scandals came to light recently only because these companies were houses
of cards that collapsed when the money went out of the system. If these
huge companies did not vaporize, a lot of investors would not only be
shrugging off the $6,000 shower curtains as 'just the cost of doing
business,' they would probably be happy to look the other way about
everything else. I think that the system that has collapsed has been
wrong-headed in being short-sighted and conveniently hostile to decent
behavior and good business sense, and that investors who are
criticizing CEO pay should also make sure that they are self-critical
about demanding immediate gratification from earnings reports and
willingness to accept flimsy explanations of corporate business
models, strategies, and products.
"What was it that playwright Henrik
Ibsen's goal was: to leave everyone in the audience at the end of the
play feeling guilty? I think that this is what we have here. There are
plenty of innocents and victims in the audience, but I think that a lot
of the finger pointers yelling at the failed CEO's might have been
themselves part of the problem. A lot are just angry that they lost
money, but that's OK, if this is the only way for a very twisted system
to start to get reformed."
Q2. Would changes in stock options,
such as making companies expense them, make it more difficult for
smaller, startup companies to attract good talent in leadership
positions?
A2. "In that
Conference Board report, some reasonable dissenting opinions were
expressed about the danger of expensing stock options. As an executive
search firm that does a lot of recruiting in the high tech markets
worldwide, this subject obviously concerns us. We imagine that
expensing options will have an effect on the formation of thousands of
startups in the high tech area, but we think that mostly it will put a
brake on the formation of insubstantial gimmicky companies that should
not be taking capital away from real companies that actually have
something to contribute to society and to shareholders. We are also
pretty sure that even the high tech billion dollar corporate managers
will somehow figure out how to survive on salaries of a couple of
million dollars a year. They have to work somewhere. They will not just
sit at home and sulk about the new expensing rules.
"There has been some scare-spinning
about how expensing stock options will cause all of Silicon Valley and
all the other Silicon Valley-like economies in America to shut down.
But we believe that the reason why bright people decide to leave their
old companies and to start up a new company in their garage is because
they want to be their own bosses, and because they want to see their
vision made into reality. Millions of people in the high tech
industries in nearly every discipline, including CFO's, would be
perfectly happy to get a decent salary and bonus and stock in a pre-IPO
company that looks like it might be successful. The spirit of American
entrepreneurship will not be killed off because the rules will be less
favorable to companies that treat stock certificates like those
proverbial Argentine railroad stocks in the early 20th Century that
people used to paper their walls with.
"People trying to squeeze out of
corporate America short term management vision, fast and unaccountable
money, faked books, 'misplaced' or 'overlooked' billions in debt,
manipulation of the market by deception, and croney capitalism, are
going to help the economy ultimately, because crooked or flaky
management is a huge waste of capital resources.
"The high tech economy will be better
off if the flaky companies are not propped up. The good people who
might have been so unfortunate as to be employed at those companies
will find jobs at good firms, and we'll all be better off for it."
Q3. Do you think stock options
should be expensed?
A3: "Probably.
But let's not look at expensed stock options as the silver bullet to
fix all of the problems. Frankly, corporate America needs to hire
honest and hard working CEO's, and encourage them with good
compensation for their hard work. Playing with this or that accounting
rule isn't going to make an honest CEO out of a shark. This might help
pen in the shark's worst instincts, but this alone will not create
better CEO's or make better corporations. In Europe, for example, stock
options have not been nearly as important as in the U.S., and huge
companies are collapsing there, too. Corporate sleaze, mismanagement
and croneyism can still infect a system even if stock options are
expensed. We have to look beyond financial solutions if we really want
to root out the larger problems."
Q4. I assume that the frequency of
executives moving from company to company is good for a business like
yours, but do you think businesses would be better off in the long run
by better incenting their leaders to stay on longer with plans that
reward long term performance?
A4. "In free
societies, people stay at companies if they are very well treated and
intellectually challenged. Sometimes people stay only short times at
companies because their firm lost its financing or because they had an
honest disagreement with strategy. Just those two issues are the two
biggest reasons why most people in Silicon Valley and other high tech
areas stay only brief times at a company. Their job changes really
have little to do with headhunters, although headhunteres might find
them better positions. We normally prefer that people stay a minimum of
two to five years at their company so that they could build their
track records at that company. This way, they are more valuable in the
job market. And we recommend that people actually not take a job with a
client if we feel that they would be better off at their present
company.
"There's some misconception out there
that headhunters somehow magically cast a spell and carry off CEO's
from companies prematurely before their time. Do you know what
headhunters do? Here's the secret of the trade: we hear that someone's
doing a good job and we ask, 'Would you like to speak with my client
about their opportunity?' That's pretty much it. Nobody leaves any job
ever because of anything that a headhunter does or says. Companies
should do whatever they can to reward long term performance of all
employees. From ART's standpoint, that would be great, because it would
nurture the types of executives that we and our clients like most. We
do not really know what to do with a person who was VP for six months
at one company, bopped over to another company and was President for
eight months, then took a 'hiatus' for a year, came back and worked as
COO at some other company for a year. We want to see candidates with
bona fide long term track records doing real things at real companies.
We need to understand what successes that person has had. We do not
want to present people who do not have solid accomplishments at their
company, so it is actually in our company's interest to see people stay
on at their companies and do well with them. We would prefer that when
we call such a person about a job with our client company, that the
pressure would be on us to find something much, much better than what
that person has now. We like that kind of challenge. That makes us have
to work harder, but it's worth it because it feels right"
Q5. Should CEO compensation
packages be tied more to performance as it is for most of the people
who work for them?
A5: "Absolutely.
As a matter of fact, we encourage our clients and candidates to talk
over fair compensation plans based on reaching pre-set targets."
Q6. Have you seen The Conference
Board's recommendations on executive compensation release 9/17? Do you
agree with their findings?
A6. "Generally,
we feel that the Conference Board's recommendations are good,
particularly in recommending that there be a focus on executive pay
being tied more to long term results and good operational governance,
rather than on CEO's having to play the stock market on a daily basis.
The existing compensation incentives and market expectations of CEO
behavior have left the door open to the few outright corporate abusers
and looters. But perhaps even worse is that for decades the market's
preference for fast money has had the effect of diverting so much
positive human energy from those many hardworking and forthright CEO's
who do want to make their companies great companies but who would be
criticized at every moment by shareholders and analysts if they spent
'too much' on R&D, or 'too much' on human and capital improvements
and other unsexy or costly investments that help make companies great
in the long term. Maybe if the rules are skewed toward rewarding CEO's
for making good companies, investors and backers will not be able to
put as much pressure on CEO's to make quick fixes just to look good for
the quarter."
Q7. Do most large companies have
truly independent compensation committees on their Board of Directors?
Is it practical?
A7: "We can only
hope for the best. At least if there is a rule saying that there
should be independence, meaning that stacking the deck is against the
rules, as opposed to not just looking nice, maybe compensation could
be negotiated and evaluated and monitored properly."
Q8. How did compensation get so out
of whack? Or is it like baseball where CEOs and athletes are due
whatever the market will bear?
A8: "If I could
set the rules, the 1969 New York Mets would be the highest paid
players ever, because they took a team that a year before was a dead
last joke, and they played their hearts out until they won the World
Series. I see CEO's and other executives do miracles like that every
day. Compensation got out of whack in America when auditors started
becoming partners of the CEO's and when everyone else chose to turn
away. I never heard of umpires and pitchers and catchers and batters
all conspiring, along with most of the people in the stands, to fix a
baseball game, but I think that this is what might have happened with
some corporations, and that is why the game just does not seem to be as
fun as it used to seem."
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