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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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