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INVESTING: High pay for failed CEOs adds insult to injury

July 28, 2008

Labor Department figures show that average annual family incomes in the United States, adjusted for inflation, have grown just 0.8 percent since the end of 2001. On the other hand, executive pay and severance pay for fired CEOs has skyrocketed. At the very least, the average family shareholder deserves a thank you.

Surely if you are a shareholder of AIG, you expect a kind word from ex-CEO Martin Sullivan who left in June with a $47 million severance package-despite AIG's stock declining 55 percent in the last year amid an accounting scandal.

If you own Merrill Lynch stock (also down 55 percent this past year after credit-market write-downs of $41 billion), ex-CEO Stan O'Neill may write to thank you for the $160 million golden handshake. Merrill, apparently not deterred, hired new CEO John Thain for $44 million, and last week snagged a Goldman Sachs exec for a mere $89 million.

Has Bob Nardelli, the former Home Depot CEO given $210 million to leave, dropped shareholders a note? Nardelli now heads private-equity-owned Chrysler, which is reportedly on life support.

Or pity Vikram Pandit, whom Citigroup paid $800 million to buy his hedge fund. Shortly thereafter, following the ouster of Chuck Prince, Pandit was thrust into the CEO's spot. Citigroup has since shut down Pandit's hedge fund due to poor performance. As for Prince-orator of the infamous line proclaiming that as long as the subprime music was playing, Citigroup would be dancing-he was credited $29.5 million on his way out the door.

And locally, past and present shareholders of Conseco have funded an executive ATM machine. Following a shareholder wipeout in bankruptcy, stock issued in 2003 for the "new" Conseco has fallen 50 percent.

These are just a few examples of pay and severance packages that continue to be shelled out to CEOs despite huge financial losses suffered by shareholders during their tenure.

I say with due respect that most CEOs are smart and talented. And most shareholders would agree that top executives of companies should be well paid-in fact, very well paid if the company turns in above-average long-term performance.

Pay and severance packages are set by the board, and usually driven by a compensation consultant hired to help the board balance employment contracts with "shareholder interests." Yet most boards are composed of execs who were picked by the CEO and who have their own lucrative comp packages. Throw a compensation consultant into the mix who stands to earn a rich fee by devising a comp package that pleases the CEO and the board, and this clubby atmosphere is more than any costconscious shareholder can stand.

Some might call it envy, but the severance pay examples mentioned above suggest that the system is broken. It's difficult to think of another period in history where failure was so richly rewarded.

Few would advocate a system where compensation was set by a czar, but corporate America had better wise up to more rational behavior. We have been through the likes of Enron, the dot-com scams, and now the subprime slime. If episodes like these can't muster up a groundswell for change-amid the backdrop of nearly zero wage growth for the average American-then capitalism has lost its compass.

Now I wonder when Treasury Secretary Hank Paulson's note will arrive thanking us all for the $25 billion to bail out of Fannie Mae and Freddie Mac.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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