Peter Drucker, the don of management theorists and hardly a wild-eyed radical, has argued in recent years that one of the biggest problems facing American capitalism is the ever-widening gap between the pay top execs get and the wages of regular employees. To some extent, that critique of high-priced executives has been muted by the ascent of Silicon Valley companies, where nearly everyone has stock options and where most of the enormous wealth earned by execs comes from stock and not salary. But Drucker's point remains important, especially since corporate America shows no signs of stopping the preposterous practice of lavishing huge rewards on execs just for showing up.
The latest example of this trend is the severance package Coca-Cola's board of directors just awarded to departing CEO Douglas Ivester. After two years as the top man, during which Coke's profits shrank for the first time in more than a decade, its stock price tumbled, and its sales stood still, Ivester was effectively dismissed as CEO, although Coke said he had retired. (At the age of 52?) Ivester had been at Coke for 20 years, and by all accounts had done a fine job there, particularly as chief financial officer under Roberto Goizueta. When he took over as CEO, expectations were very high. He did not live up to them. And yet Coke is sending him off with a package that, by some measurements, is worth more than $100 million.
Now, there's no question that Ivester ran Coke during a time when there was a lot going on that was completely outside his control (like, oh, the near-meltdown of the global economy in 1998). But there's also no question that he did not deliver in terms of Coke's bottom line or, more important, in terms of shareholder value. He shouldn't have been crucified for this performance. But neither should he have been rewarded with a package that includes $795,000 a year in payments above his pension until 2002 and $675,000 a year above his pension for the rest of his life (or his wife's, if she outlives him); $1.5 million a year for three years; and, perhaps most egregious, $675,000 a year from 2002 to 2007 for consulting services. (Oh, and there's also the 2 million shares in formerly restricted stock that the board allowed him to exercise.)
The indefensibility of the package is such that it's not worth spending too much time on how ridiculous it is, although that bit about consulting services is truly a classic. What is important about the package is the way it illuminates the almost complete dissociation of reward from risk for executives at large corporations. Obviously, if Ivester had remained as CEO, he would have been richer than he is now. But just as obviously, the size of this severance package--particularly given the fact that he can take a job at another corporation (although not within Coke's industry) tomorrow--means that the financial cost of underperformance was mild at best. One of the great developments of the 1980s was the alignment of the interests of corporate management with the interests of shareholders, so that executives could no longer imagine that they were going to get a free ride regardless of performance. But in the last few years, that alignment has started to look increasingly shaky, in part ironically because of the bull market. Even mediocre CEOs have been able to deliver acceptable stock-market returns, so any clamor over high pay has been stifled.
But at some point that clamor should become loud again. From the need to index stock options--so they would become valuable only when a company outperforms the market as a whole--to the need to eliminate the re-pricing of options for top executives to the elimination of golden parachutes like Ivester's, there are a host of executive-pay issues that shareholders should be concerned about. Ivester is walking away with millions of dollars on top of his pension. The 6,000 workers Coke announced it's going to be laying off are walking away with nothing else. The way capitalism is supposed to work is that those responsible for the successes reap the benefits. But that works only when those responsible for the failures pay the price.