"Ed Woolard Speaks to Directors"
Edgar Woolard, Jr. is former CEO and Chair of DuPont and
current Chair of the NYSE’s Compensation Committee.
Greetings ladies and gentlemen. I'm delighted to have this opportunity to talk with you about a subject that is vitally important to me and I hope to you.
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 ten 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 I want to help Fred Cook and Jesse Brill try to change. And that is the perception of excess compensation received by CEOs getting worse year by year.
Myths of Executive Compensation
And if you agree, you can be the leaders in helping us make a very important change. I'd like to deal with it by describing several myths about compensation and trying to undermine them.
Myth #1: CEO Pay by Competition
The first is the myth that CEO pay is driven by competition and 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.
 How We Can Change
So if Bill and Sally get an increase in their
total compensation, I have to get an increase so that I will stay in the top
half. How can we change that? This is the easiest of all.
In 1990, we addressed that issue at DuPont. I
became CEO in '89. I was concerned about what was evident even then. Here is a
Business Week article from 1989. It talks about executive pay – who made
the most and are they worth it – Michael Eisner, $40 million in 1988, Ross
Johnson, $20 million and others. I don't know Michael Eisner, but I know even 15
years later he's one of the most criticized CEOs in the country.
Internal Pay Equity
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%."
That to me seemed equitable. It
had been anywhere from 30% to 50% in the past. I said, "let's set it at 50% 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.
You can do this. 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 #2: Compensation Committees are Independent
What are the other myths? That compensation
committees are independent. Well, I give a "double bull" to that one. You know
it could be they're getting that way now, but 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.
How We Can Change
The first one is when John Reed came back to New
York Stock Exchange to try to clean up that mess, he made the decision – which I
admire him for – 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, they 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 they 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
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.
Well, I was on a board 15 years ago and four CEOs
were on the compensation committee and for two consecutive years, we gave the
CEO and the executives there no bonus, no salary increase and modest stock
options – because their performance was lousy those two years. After that, they
did extremely well and we paid them extremely well. Use your outside consultant,
pay–for–performance only.
Myth #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 chest
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. I think he's terrific.
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.
So you've got this more recent high level of pay
and then you've got the "ratcheting effect" in the system. Those things have to
change. The stock market bubble was totally artificial.
Myth #4: Severance 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.
We Have a Responsibility
If any of you agree with me – and I know some of
you probably won't, but the majority I hope will – that this is killing the
image of CEOs and corporate executives. It has to stop because we need the
respect of our employees and the general public.
And there's a lot of skepticism about leaders in
politics and in churches and in the military, but we can't have it. We can't
have it in the business community because we're the backbone of the market
system that has made this country great and its made so many opportunities for
people. But the corporate leaders have got to show leadership. We can't be seen
as either dishonest or greedy. And now I'm telling you I think we're in the
league with lawyers and politicians when it comes to our image. I don't like
that. I don't want to be there and I don't think you do either.
You Can Do Something About It
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 for the
last five years, look at the value of those. There's nothing in the Bible that
says that 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. 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.
And I want to thank Fred Cook and Jesse Brill for
their determination. I worked with Fred a long time; I greatly admire him. It’s
important. It’s important for our image, for our reputation, for integrity, for
trust and for our leadership in this country. Thank you very much.
We encourage you to see the inspirational video of Mr. Woolard – and share this important video with others.
To learn more about Internal Pay Equity, don’t miss the session
on:
"Implementing Internal Pay Equity" at the upcoming "2nd
Annual Executive Compensation Conference."
Also, you will not want to miss what John Reed and JPMorgan
President Jamie Dimon will say at the Conference to fellow CEOs.
If you have not yet made live or webcast arrangements, we urge
you to
hold your place and register now.
Other important guidance for directors and CEOs can be found on
CompensationStandards.com.
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