The Advisors' Blog

– Liz Dunshee

Not only is Cap’n Cashbags real, he has proteges embedded in boardrooms. This blog from Pearl Meyer’s Jim Heim gives specific examples of how they make the argument for “more, more, MORE!” – and some ideas for inoculating boards against greed. Here are some red flags:

1. Move the goalposts. Your greedy executive may point to success with respect to top-line growth when your investors (and your incentive plans) are focused on margin expansion. Or question why revenue is given greater weighting than operating income when selecting peers for benchmarking purposes. Or raise any of a thousand other objections which all boil down to: “Measure me on the areas where I perform well, not the areas you deem important.”

2. Benchmark by anecdote. Your greedy executive may bring you a proxy filing of a competitor who pays their own similarly-titled executive more, without doing the homework to understand which is the anomaly—your greedy executive’s pay or the pay of this supposed peer. Questions arising from this type of behavior are a weekly occurrence in my work. But I have never heard of an executive asking for explanation as to why a competitor is paid less than s/he.

3. Pay me twice. Following a multi-year period of strong performance, the greedy executive asks whether some form of supplemental award is in order. In almost all cases, there is sufficient leverage in the incentive plans such that the executive has already reaped several years of above-target payouts with respect to both cash bonuses and performance shares earned, and equity-denominated vehicles are now much more valuable than what was expected on date of grant (due to accompanying run up in stock price). The executive has already been paid for the performance.

4. I’d like the reward, you can keep the risk. The greedy executive is eager to sign up for a program that will provide extraordinary rewards for extraordinary performance, but questions the fairness of having similar downside risk in the program. “If we meet these aggressive goals, it is most likely evidence that the management team has executed flawlessly against a well-conceived strategic plan…but if we fail, it’s most likely due to exogenous factors. Since those factors are out of our control, we ought not be held accountable for failure to perform.” Or, more succinctly: “Heads I win, tails you lose.”

5. I didn’t like Mom’s answer, so I’ll go ask Dad. The greedy executive attempts to circumvent his/her CEO and go directly to a board member with concerns over his/her pay. This may be exacerbated by a weak CEO inadvertently (one would hope) encouraging this behavior with a “my hands are tied” aroach to communicating a pay decision.