Blog on Exec Comp - Mike Critelli, Executive Chairman, Pitney Bowes - 10 Nov 2008

EXCESSIVE EXECUTIVE COMPENSATION

I
can readily understand why people who are not executives of large
businesses can be bewildered and outraged by CEO compensation,
especially when it is given in big chunks of severance to CEOs who have
failed at their companies.  The obvious question is: why would boards
of directors have approved these outsized packages in the first place?

One very insightful book on this subject was actually written six years ago.  It is entitled Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, by Rakesh Khurana. 
What is unimaginable today is the degree to which shareholders, boards
of directors, rating agencies, the media, and even the public believed
in the notion that there were a handful of exceptionally talented CEO
candidates that companies in trouble, or, for that matter, companies
not in trouble, but desirous of improving their results, should spare
no expense in recruiting.

One example that comes to mind is Robert Nardelli, who was at GE and
did not get the CEO position.  Nardelli is a very talented executive,
but when Home Depot was recruiting him, there was a widespread belief
that he was one of those “corporate saviors.”  Home Depot’s board was
very likely under a lot of pressure to recruit someone of Nardelli’s
caliber, so, among other terms and conditions, they agreed to a
severance package that now looks very excessive.

Today, we understand better that CEOs, like any other people, are
limited in what they can accomplish.  When they succeed, they may be
catalysts for an organization, but there needs to be a good business
model, a critical mass of talent, and the right external environmental
conditions.  Relative to the business model, that is, the value
proposition of the company and its way of delivering that value
profitably to customers, Warren Buffett once said something to the
effect that when a highly-talented leadership team collides with a
flawed business model, the business model generally wins. 

Beyond the flawed belief in the “corporate savior,” the pressure on
a board to recruit the best and the brightest, and the time pressure
under which many boards operate when they are recruiting an external
CEO, there are other subtle factors that drive up compensation in these
negotiated contract arrangements.

While the executive search firms are retained by the company and are
accountable to the board, they also succumb to the subtle pressure to

continue post here...

http://www.mikecritelli.com/2008/11/10/excessive-executive-compensation/