Why Do CEO’s Fail and Receive Millions in Return?

Posted by Frank

March 8, 2008

Yesterday, top financial executives from the likes of Countrywide Financial and Citigroup, were asked by Congress to explain why they made so much when their companies and customers were hit with not only losses to their wallets but to their homes. It was quite certain from the start of this hearing that there just isn’t a good explanation for making millions when your company is losing billions. Countrywide Financial is considered one key reason why our economy is where it is. Countrywide is the biggest home lending institution and was considered an “innovator” with it’s sub-prime lending products like ARMS, which is now considered a bad word. Let’s take a look at what exactly these CEO’s make…

Countrywide Financial
Angelo R. Mozilo, Countrywide’s Financial Chief Executive, started the lending giant many years ago. Although he started the company and in my opinion has the right to make as much as he wishes, he gave up this right when he decided that his company should be publicly traded. When a company lets the public take ownership, they are essentially saying that everyone is a co-owner, thus, in my opinion gives the shareholders a right to approve executive pay packages. Mozilo led his company to billions of dollars in losses last year but walked away with over $120 million in compensation. This sounds ridiculous, but it is increasingly becoming more common.

Citigroup
Charles O. Prince is the former Citigroup Chief Executive that left the company last year with a $10 million bonus, $28 million in stock and options and $1.5 million in other perks. Keep in mind that while Prince is relaxing in his vacation home, shareholders are taking it on the chin, as Citigroups shares are down 58%! This is another classic case of an executive who made poor business decisions and is rewarded for leaving. Shareholders should be up in arms! Although some companies now allow shareholders to submit a vote dealing with CEO pay packages, it needs to become the norm. I understand the philosophy that high pay attracts the brightest and best, but there is a limit, and it has been reached.

How Is Pay Set?
Have you ever heard of executive compensation consultants? These consultants are hired by a company to come up with appropriate and competitive salaries for employees including CEOs. At the surface, this looks like a good idea, however, it exposes a major problem of conflict of interest. In many cases, like with Countrywide, Mozilo is hiring and paying a consultant to decide what his pay should be. If he doesn’t’ like the outcome he can fire the consultant and hire somebody else until he gets a figure he wants. In addition, these consultants do other work for the companies. This means that its is in the best interest of the consultant to decide the CEO and board members receive hefty pay packages, so that he can continue to get paid to do additional work with the company.

While I don’t have a problem with CEO’s making major dollars, because they deserve it for taking chances and making decisions that many of us would hate to be faced with. But when these CEO’s are making millions while their company they oversee and the customers they are dealing with are losing their homes, retirement savings, and lives, I do have a problem. $

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