Tuesday, January 16, 2007

How Rising C.E.O. Pay Spreads

Is Kenneth Langone “Patient Zero” — the primary carrier of a malady that makes corporate boards feverishly inflate executive pay? At the least, he is what The New Yorker’s James Surowiecki dubs a “supercarrier,” given his track record, which includes that of recently ousted Home Depot head Robert L. Nardelli. And abetting Mr. Langone is the clubby world of corporate boards, an increasingly interconnected social network where directors and executives tend to scratch each other’s back.
Mr. Langone is no stranger to showing C.E.O.’s the money. Among the outsized pay packages he played a role in approving: the golden hello that brought Mr. Nardelli to the home-improvement giant — and helped lead to his ouster; the pay package to former New York Stock Exchange Chairman Richard Grasso that is now at the center of a dispute with New York’s attorney general; and a ballyhooed golden parachute given to now-retired General Electric Chairman John F. Welch.
Yet Mr. Langone is simply representative of Home Depot’s highly connected board. Its directors sit on an average of two other boards, and the chairman of its compensation committee sits on four.
Such connections can help a company. For instance, the networking often leads to new business opportunities. But studies also seem to show that as those connections grow, so do the chances that a C.E.O.’s pay will rise above the norm. Coincidentally, so too do the odds that said company’s stock will underperform the market.
Mr. Surowiecki concludes:
In the end, the very things that make people likely to join a board—connections, business experience, sociability—are also the things that make them less effective once they do.
It’s worth noting one additional thing. Though Mr. Langone has never denied that he is an adherent to paying top C.E.O.’s top salaries, The New York Times previously reported that he broke with his old friend, Mr. Nardelli, when the executive refused to take a pay cut in light of growing shareholder agitation.
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