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When CEOs Don't Glitter: Where The Buck Must Stop?

The key to success or failure of a company lies in the competencies and maturity of a CEO handling pressures of all kind juggling with his own emotions inside as per situations, talent movements and stimuli expected out of him managing rough patches

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There is a growing global trend one observes lately that while the star CEOs are paid soaring salaries as per excellence in performance and returns on capital or rising profitability, they are also paid heavily in times of downturns, recession, underperformance or retirement either willingly or tacitly. We often hear or we don't (undisclosed) the handsome severance packages while on retirement and companies even offer golden handshakes or parachutes rather liberally to exit smoothly when they fail to deliver.

The key to success or failure of a company lies in the competencies and maturity of a CEO handling pressures of all kind juggling with his own emotions inside as per situations, talent movements and stimuli expected out of him managing rough patches. It is only commonsense to derive that a smart and performing CEO is what makes companies build fortunes; the profitability and appraisals of other employees certainly depend on that. While it is a highly coveted position, it is a role that comes with huge accountability, stress and a professional life with extremely tough or ruthless choice and hence it may seem justified that CEOs must be paid for life, even if it means dearly in amount and dearly to the company and to other not so privileged employees.

Last month, it was revealed, Apple's CEO, Tim Cook reaped $373 million in stocks over his 5 years as its CEO as the stock doubled on his watch. Cook's payout is based on Apple returning 61 percent on his vested stock every year since 2013. He has used buybacks and dividend increases to ensure that Apple Stock outperformed S&P 500 even if sales slowed.

In India, it is observed that most of the CEOs of listed companies have seen an exponential rise in their total compensation over the last two years largely 100 per cent rise and in few cases even more, meaning salaries and other benefits like allowances, commissions, ESOPs et al. While this looks like a very healthy scenario, the bottom line is - higher the salaries more the CEOs performance under a constant vigil and pressure to protect that package. And parallel to this we see the divide of salaries only widening i.e. the average or median salary paid by companies to other employees.

But coming back to the contention as to why CEOs still take home a heavy gunny bag full of green even if their performances had not been at par, have not resulted in turnarounds and breakthroughs as expected or desired rather have created troubles for the board managing growth or tumbling stock prices.

Recently, there are many worldwide glossy and glamorous examples where some CEOs have also received more than Golden Handshakes while quitting companies rather 'Platinum' handshakes! Their failures which are rather more expensive for companies to contain, conditions are perhaps complied by boards to behold secrets that if revealed immediately to the external world can cause irreparable damage to reputation, unparallel product development, market intelligence and goodwill for a very very long time to come. They had not only been prime brand ambassadors but also future strategists and direction setters and that can cost a great deal to companies especially the giants.

While the reasons are extremely sought after and I chortle when I say that under the breath, it may indicate some form of unstated understanding either to keep them motivated or the board may have decided that it serves as a great motivator or may simply be used as a hedging tool against market cap erosion in time of exposure to risks or CEO's exit. The decisions are also depended upon the personality of the person assigned or acting as the CEO considering how safe his exit may remain to the company and its continuity plans.

When few months ago, celebrated Nikesh Arora, President Softbank Group, a Japanese Internet conglomerate, had taken third spot in global best paid executive list with $73 million salary, surprised the world when he quit at a shareholders meeting apparently over differences with the founder Masayoshi Son on former's bloated pay. The founder who hired Arora drew $1.2 million himself. Arora continues as an adviser unless more comes out in news.

As part of the retirement toast, there have been other global instances that have appeared as insightful for companies to learn from.

Gregg Steinhafel, CEO of Target stepped down in May 2014 following a massive credit card data breach and money-losing expansion in Canada exposing serious weaknesses in the retail chain's operation. The 35 years stay in Target, as a veteran Steinhafel received a golden parachute valued at more than $47 million and stock options that he can continue to exercise over the next five years, taking the entire walk away package to almost $61 million. This roughly is 1044 times the average balance of $45000 that workers saved in company's 401 (K) plan.

Rex Tillerson, CEO of Exxon Mobil after 10 years at helm of world's biggest publicly owned oil company is scheduled to retire next year has his pension valued $21 million in 2013. He also has a supplemental pension valued at $21.1 million and an additional payment plan valued at $38.6 million. Any case, by close of this year he would have drawn 500 times the median US household income and all this is despite that Exxon's credit rating has dipped as S&P considered lower revenues accruing due to falling crude oil prices, high cost investments in replenishing reserves and maintaining oil and gas production and large dividend payments. This seems environmental factors haven't affected T-Rex's gains (as the politician Sarah Palin calls him) as the retiring CEO.
Now, logically CEOs must be paid as per the returns on capital investments or the value their respective skills and experience has contributed to the growth and hence an ideal performance metrics in accordance with the ROC. But it seems the trend is still in a reverse gear where higher salaries are a continuum tool to allow or reinforce CEOs performance still used tactically as a carrot stick rather excellence in performance driving top salaries or simply put relative pay for relative performance.

Among top 200 companies studied, a joint analysis by O'Byrne and Van Clieaf concluded that 74 of them overpaid their CEOs in 2015 based on five years of underperformance in return on capital (ROC). The total over payments in 2015 for CEOs at these companies was $835 mn. At, ROC fell 23% over the last 5 years. As result, Marc Benioft its CEO received $31 million more last year than was justified by company's performance as per industry. Jeffrey M. Leiden, CEO of Vertex Pharma received $27 million in excess pay based on company's negative 35% ROC over the period. Hence, even ROC as the ideal way to measure CEO operations was challenged. In case where companies' business models are based on recurring revenues, CEOs assessment on basis ROC can be misleading and not reasonably calculated. Similarly, some CEOs may also be lead to underpay when they deliver outsized returns.

While India too seems to have arrived at a competitive landscape where it has made a remarkable effort in shedding disparities of soaring salaries of global counterparts but the average Indian CEO pay even at the highest of levels so far ever in India are yet to touch what CEOs in US receive. By end of last year, the median pay for a top corporate executive in 200 large American companies was over $19.3 million (Rs. 128.3 crores). The average of $ 3,008,000 (Rs. 20 crore), as revealed in one of the recently conducted studies, paid to an Indian CEO is still one-sixth of the median of a US CEOs pay, but it may still appear as a healthy sign that the divide is narrowing.

Anywhere around the globe, for both investors and chairman or the board of directors - performance must be ideally measured on real or actual profits generated from companies' competitive product or service offerings but this may also be highly impractical when put in practice. The economy may perhaps need steady and time tested shock absorbers to prepare for downturns or world recession, till then the CEOs will have to continue to bear responsibilities, lead and hold accountability if for victories, wins and success then also for failures and accept deductions gracefully in their heavy pay outs. Life isn't a bed of roses always but must be lead fairly as much possible and especially by the CEO.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Dr Yasho V Verma

Dr Yasho V Verma is a Management Thinker & Philosopher, a Mentor and a Strategy Consultant, an Academician and a Veteran in consumer durables and retail. He was formerly associated with LG Electronics as its COO and Director. Currently he is consulting with World Bank. He is also a member on Board of Dena Bank and an advisor to Videocon. Besides, he is in the board of few other business houses across various industry verticals and consults them on plans and policies.

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