Consumer Confidential
For CEOs, failure can be lucrative
Steven Castello, a maintenance
worker in
After running up thousands of dollars in debt on nine credit cards, he didn't
file bankruptcy. He didn't try to dodge his obligations. Instead, Castello, 57,
went to a credit counseling service and, patiently, painfully, paid his bills.
"This was my foolish mistake," he told me. "I
had to take responsibility."
Compare Castello's situation with that of Angelo Mozilo, the well-tanned chief
exec of mortgage lender Countrywide Financial Corp.
After driving his company to the brink of bankruptcy (or so the rumor mill had
it last week), Mozilo now stands to make as much as $115 million in
severance-related compensation if an acquisition of Countrywide by Bank of
America goes through, which it almost certainly will.
Accountability? We should all be so lucky.
"What's particularly egregious is that he's walking away with millions of
dollars as people are being forced out of their homes because they can't make
their mortgage payments," said Dan Pedrotty, director of the AFL-CIO's
office of investment.
Mozilo, 69, made enormous amounts of money running Countrywide during the boom
times. He pocketed $160 million in 2005 and $120 million in 2006, mostly in
stock option gains.
Countrywide and other financial firms have faced tougher sledding in recent
months with the bottom falling out of the mortgage market amid a tightening of
credit for higher-risk loans.
In August, Countrywide was forced to draw down its entire $11.5-billion credit
line. Weeks later, the company said it would hand pink slips to as many as
12,000 workers, or about 20% of its workforce.
Countrywide's stock lost 79% of its value last year.
Amid rumors of a possible bankruptcy filing, Mozilo and Countrywide finally
turned to BofA to rescue their behinds from the fire. The bank, which had
already invested $2 billion in the company, will pony up an additional $4
billion in stock to become the nation's top mortgage lender.
So what sort of consequences will Mozilo face for his managerial failure?
Aside from nearly $88 million in cash, he'll have to make do with not one but
two pensions, accelerated payment of stock options, free rides on the company
jet and his country club bills being paid until 2011.
Man, that has to sting.
"This is another clear example of pay for failure," said Fred
Whittlesey, principal consultant with Compensation Venture Group in
A lot.
That's not because ordinary shareholders aren't cheesed with these
who's-your-daddy pay packages. It's because many boards of directors lack
either the spine or the inclination to stand up to their CEOs and deny them the
fat contracts that contain such ludicrous severance terms.
"Every year, there's more talk about boards getting tough," said
Whittlesey, who is a Countrywide shareholder. "But every year, they keep
saying yes to these contracts."
One problem is that big companies' boards are frequently dominated by senior
execs from other companies, who have little interest in drawing the line on
runaway pay. Another problem is that each board that agrees to some make-my-day
CEO contract sets a precedent for other boards.
The situation is only exacerbated by compensation experts ostensibly brought in
to be neutral parties in pay matters but who are in fact conflicted by their
desire for continued business and thus readily sign off on hypergenerous terms.
"I don't think you're going to see any dramatic changes in this in the
near future," said Paul Dorf, managing director of Compensation Resources
Inc., a
One irony, he said, is that transparency rules for CEO contracts required by
the Securities and Exchange Commission have given execs a better sense of how
much their rivals are making. This has spurred demands for equally sweet pay
packages.
So what do we do? The experts say that, sooner or later, shareholders will
demand greater accountability from corporate boards. But people have been
saying that since Enron imploded, and where has it gotten us?
The extreme solution is some sort of legislative remedy. But I don't think we
really want politicians -- who aren't exactly models of fiscal probity --
micromanaging people's paychecks.
Perhaps a more practical fix is a regulatory requirement that any publicly held
company with, say, more than 1,000 employees must give shareholders a voice in
how much the CEO pulls down.
This is known as "say on pay" in business circles and is gradually
gaining traction at some companies. For example, Verizon Communications passed
a measure last year that gives shareholders an advisory vote on compensation
for top execs.
But advisory votes are just that, advisory. A board can ignore such a vote if
it chooses.
To address that, I propose that the members of board compensation committees be
required to defend their decisions at shareholder meetings (in plain English,
please) and that committee members routinely be subject to confidence votes.
This may not give shareholders a direct say over how much the CEO gets paid,
but it would make boards more accountable for their actions. That in turn
would, hopefully, make CEOs more accountable for theirs.
But I'm not holding my breath.
Castello, the maintenance man, learned his lesson the hard way. "I know
that I can't handle credit cards," he said.
Too bad Countrywide's Mozilo lacks the same humility.
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