December 13, 2005
Excerpts: The Battle For The Soul of Capitalism - Part XXI
Extraordinary Compensation for Ordinary Performance
The record is clear that investors have a big stake in executive compensation. A study by Morgan Stanley’s former chief strategist Steve Galbraith found that “one way [for CEOs] to rake in the dough has been to preside over a company with an underfunded pension plan, large layoffs, and mediocre stock performance.” (While Mr. Galbraith does not argue causality, more extensive studies may well make such a case.) Analyzing the 500 companies in the S&P Index, he found that the six companies whose CEOs made more than $50 million in 2002 provided average annualized returns in 2002–3 of minus 40 percent, compared to minus 3 percent for the remaining companies in the Index.
Galbraith argues that “the root appeal of capitalism revolves around extraordinary reward potential for extraordinary performance, [but] what is less understandable are extraordinary compensation packages handed out for ordinary performance.” Thus, despite wildly errant growth projections, these seemingly failed executives (or terrible forecasters) were rewarded with increases that took their average annual compensation to new heights—an amazing failure of prudent governance by corporate directors. Paraphrasing Churchill, never has so much been paid by so many to so few for so little.
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