Former DuPont CEO Edgar Woolard debunks some of the myths surrounding executive pay.
It's not every day you hear a retired CEO hammer business leaders about excesses in CEO pay. But that's clearly what took place last Oct. 31, when retired DuPont CEO Edgar Woolard addressed the 2nd Annual Executive Compensation Conference.
Woolard, who now heads the compensation committee for the New York Stock Exchange, has long been a proponent of "pay equity." At DuPont, he set the limit of what a CEO could be paid at 1.5 times the pay rate of the executive vice president.
Woolard, 71, takes aim at several aspects of executive compensation, including the competitive nature of CEO pay today, the problems with comp committees, the "ratcheting up" effect that's inherent in today's system and pay for nonperformance.
Below are highlights from his remarks.
There's a major concern out there for all of us. I personally am extremely saddened by the loss of the respect that the current corporate leaders of this country have experienced.
We've had a double blow in the last 10 years or so. The first one we know way too much about--the fraud at Enron, Tyco, Adelphia, WorldCom and many others.
The CEOs say there were a few rotten apples in that barrel -- and maybe that's the answer--but there are a hell of lot more rotten apples than I would have ever guessed. But I'm not here to talk about that. That's just the base of one of the issues that has eroded the trust and confidence in American business leaders.
The second one is one we all know a lot about. . . . And that is the perception of excess compensation received by CEOs getting worse year by year. . . . I'd like to deal with it by [undermining] several myths about compensation . . . .
Myth No. 1: CEO Pay is Driven by Competition
To that I say "bull." CEO pay is driven today primarily by outside consultant surveys -- and the fact that many board members have bought into the concept that your CEO in your company has to be at least in the top half, and maybe in the top quartile.
So we have the "ratchet, ratchet, ratchet" concept. We all understand it well enough to know that if everybody is trying to be in the top half, everybody is going to get a hefty increase every year.
[At DuPont,] I want CEOs who are respected and highly regarded. So what we did was we went to "internal pay equity." It's a simple concept. I went to the board and the compensation committee and said, "We're going to look at the people who run the businesses, who make decisions on prices and new products with guidance from the CEO -- the executive vice presidents -- and we're going to set the limit of what a CEO in this company can be paid at 1.5 times the pay rate for the executive vice president -- 50 percent."
That to me seemed equitable. It had been anywhere from 30 percent to 50 percent in the past. I said, "Let's set it at 50 percent and we're not going to chase the surveys." And this is the way we have done it at DuPont ever since then. I think we have tweaked it up a little bit since then, but it still is the right way to go.
Every one of you can do this on your boards. Take a look at the equity -- not just from a CFO or one executive vice president, but from several groups -- and you'll notice that the CEO internal equity is greatly increased because the CEO is not going to overpay the other people.
Give a serious consideration to having your people -- the HR people, the compensation people -- look at what's happened to internal pay equity and seriously consider going in that direction. That will solve this problem in a great way.
Myth No. 2: Compensation Committees are Independent
I give a "double bull" to that one. It could be they're getting that way now, but in the last 15 years, they haven't been that way.
Let me describe it. The compensation committee talks to an outside consultant who has surveys that you could drive a truck through and pay anything you want to pay, to be perfectly honest. The outside consultant talks to the HR vice president, who talks to the CEO. The CEO says what he'd like to receive. It gets to the HR person, who tells the outside consultant -- and it pretty well works out that the CEO gets what he's implied he thinks he deserves so he will be "respected by his peers."
Now the compensation committee is happy that they're independent, the HR person is happy, the CEO is happy and the consultant gets invited back next year. There's two ways to change that as well.
First, when John Reed came back to the New York Stock Exchange to try to clean up that mess, he made the decision . . . that the board was going to have its own outside consultant who was not going to be allowed to talk to internal people -- not to the HR vice president, not to the CEO.
I'm the head of the comp committee at the NYSE, and when I talk with our outside consultant, [its people] give us their ideas of what they think the pay package ought to be. Then, I talk to the compensation committee; we have the consultant there; we make a decision; I talk to the HR vice president to see if [he or she's] got any other thoughts -- which isn't likely to change -- but we are totally independent. Our compensation committee is independent and it works extremely well. You can do that.
The other one is you can truly insist on pay for performance, which everyone likes to talk about but no one does. They pay everybody in the top quartile if they have good performance or bad performance or if they're going to be fired.
Myth No. 3: Look How Much Wealth I Created
This one is really a joke and it was born in the 1980s and '90s in the stock market bubble, when all CEOs were beating their chests about, "Look how much wealth I've created for shareholders."
And I'd look to the king, Jack Welch. Jack's the best CEO of the last 50 years and I've told him this. He says, "I created $400 billion worth of wealth." No, Jack, no you didn't.
That was when the stock was 60, when the bubble burst it went to 30 and it's in the low 30s now. You created $150 to $200 billion, but there are two things wrong with that. I don't care how much money Jack Welch made, that's wonderful. God bless him.
But what did it do? It's setting a new level for CEO pay based on the stock market bubble and all the other CEOs were saying, "Look how much wealth we created," so you had a whole new level of pay which has been built upon.
Myth No. 4: Severance is for Failing
The last one is the worst of all. Any of you directors who agree to give these huge severance pay packages to CEOs who fail -- Phil Purcell, according to the press, got $114 million, Carly Fiorina at Hewlett Packard, $20 million -- why are you doing that? No one else gets paid excessively when they fail. They get fired; they get fair severance.
You can do something about it by issuing a challenge to these CEOs and taking some actions yourself.
CEOs: Some of you show the leadership and say we're going to do internal pay equity. It's easy to get the data and then you can decide what you think is fair and how much you think the CEO contributes versus the other business leaders who make their companies so strong.
Compensation committees: Seriously consider implementing internal pay equity. Pay only for outstanding performance. Quit giving people money just because Joe and Sally are getting it.
Consider going to an independent consultant that deals only with the board, and you deal with the HR and the CEO. Keep the consultants away from the CEO and the HR people, because they all benefit too much by being able to "cook the cake" together.
Lastly, take a look at stock-option packages. Not just for one year. They're just so large now. The mega-grants and all this stuff that built up in the '80s and '90s.
If you've given huge stock-option packages over the last five years, look at the value of those packages. There's nothing in the Bible that says you have to give increased stock options again every year.
Give a smaller grant. Give a different kind of grant. Put some kind of limits on them. There's many ways to do it. If you do all these things and if you look at them, these are the prescriptions that can get us back under control.