Inside Financial Services

Dumb CEO-Compensation Tricks

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Have you heard of Hanlon’s Razor? It is very sensible, and goes like this: Never attribute to malice that which is adequately explained by stupidity. Hard to argue with, right? Hanlon’s Razor has been on my mind a lot lately as I continue to wade through the company proxies that have piled up on my desk. I think of it especially as I marvel at the seemingly infinite variety of ways companies have dreamt up to pay their top executives. Some of the ploys seem custom-designed to send the Evelyn Davises of the world into a full-blown lather. But for others, I just shake my head and wonder, what in the heck are these people thinking? Here’s an example: at one $10 billion retail institution (no names, sorry; I have to deal with these people), it is apparently the policy, as gesture of Yuletide goodwill, to pay to all employees a holiday bonus of $1,200 at Christmastime. I’m fine with that, and am sure the tellers, floor clerks, and other rank-and-file employees are pleased to get the extra money. Happy holidays! The CEO of this same bank was paid over $2 million last year. And yet-you saw this coming-he gets a $1,200 holiday bonus, too. At some comp level, executives should be expected to fund their own Christmas shopping, don’t you think?, and $2 million is surely well above that. What are these people thinking? Here’s another: the non-bank lender (which also shall not be named) that pays $11,000 and $7,000, respectively, to pick up the CEO’s and CFO’s annual parking tabs. Parking? Why parking exactly? Who comes up with this stuff? Then there’s the institution that that funds the “tuition expense paid to Mr. [let’s call him Smith] for the benefit of his dependent.” A family member’s tuition! Presumably the bank isn’t funding his beer money, too.
The list goes on and on. As I read these things, the temptation-I’m fighting it now-is to whip oneself into a frenzy of moral outrage about all the ways companies have found to nickel-and-dime their shareholders. And there certainly is a lot of that. But more likely (see Hanlon’s Razor, above) is that some of the people who participate in making compensation decisions at these companies are idiots. How else to explain why a CEO who makes $2 million a year gets a $1,200 Christmas bonus? It’s not venality it’s simple carelessness. The wonder is that the people who run these organizations-who are all bright, capable individuals-don’t stop and think for a moment, and then put a stop to the absurdity.Not all companies go in for this nonsense, of course. I know of one bank in the Midwest, for example, that doesn’t even expense employees’ meals when they travel. “I remind people it is not our money, it’s the shareholders,’” its CEO says. Good for him.But he’s in the distinct minority. There seems to be no end to what companies will pay for. Here’s one last one: the homebuilder who provides its top six employees an annual automobile allowance of $4,800 and then reimburses the cost of the gas they use. One hesitates to overly generalize on these matters, but I think it’s safe to say that the CEO of every public company in America can afford his own car and can pay for his gas money out of his own pocket. Dumb . . . . What do you think? Let me know!

11 Responses to “Dumb CEO-Compensation Tricks”

  1. david

    it’s not oversight, I promise you. if the $1200 is withheld this Christmas, I PROMISE you the CEO will make a stink. he knows he’s getting the bonus. and the people below are afraid to tell him of the optics. they all assume we don’t notice, which is usually the case.

  2. SW Pilgrim

    Private aircraft use must must be well hidden if you can only gnaw at parking expense( tenants versus owners’)Also, back in the day, both urban and suburban club fees used to run into 6 figures .

  3. Greg

    Agree w/ each example you’ve cited Tom, but must say that the midwest bank that doesn’t expense employee meals while traveling….hmmm, I’m guessing they don’t get a whole lot of employees (executives included) that are willing to hop on a plane or hop in the car to go see customers. There can be extremes in both directions.

  4. John Tschohl

    Tom in the future name names. Do not let these idiots get by with this.

  5. Greg

    Agree w/ each example you’ve cited Tom, but must say that the midwest bank that doesn’t expense employee meals while traveling….hmmm, I’m guessing they don’t get a whole lot of employees (executives included) that are willing to hop on a plane or hop in the car to go see customers. There can be extremes in both directions.

  6. Bob

    I would bet a lot of this is simply history with no one reviewing it. The $1,200 strikes me as the kind of thing a small bank would do and the owner would be Chairman of the Board and would decide to give everyone a $1,200 bonus. It would be seen a treating everyone equally. I goes on for a few years and the Chairman moves on but the bonus remains while the bank keeps growing. A few more years down the line the company grows and now there comes more serious bonus money for the higher ups. No one thinks of the other and it goes on. Presently you have the situation you have today. It would be interesting to have it brought to the board’s attention.

  7. Doug

    Midwest bank that doesn’t expense meals while traveling. Sounds like 5th/3rd and their “I fly coach and sit in the middle seat” CEO. I’m okay with not expensing lunch, but breakfast and dinner should be on the company. There’s lean, and then there’s cheap.

  8. george krug

    Right on …. but I don’t think you are approaching the tip of the iceberg!!!!

  9. Charlie M

    Enjoyed the article as usual. A couple of comments: Would the recipients of the $1,200.00 Christmas bonuses have been happier if the bank just stopped giving bonuses? That way the CEO would not have received his. Of course you are correct, but we do not want to run the risk of being happy because someone who makes more than we gets less. What is truly needed is for everyone to be motivated into earning more, not to envy what others earn or receive.
    As a comment of the travel expenses–When I once served on the board of a bank making mostly farm and ag loans our mixed drinks were part of our food allowance at meetings. I never charged a drink to my expense account. I diid not want a lot of farmers saying, “Yeah, and we pay our interest and they go to New Orleans and drink free whiskey on us.” That being said in the 1980s as they were going broke. It might be different today.

  10. Banker

    I agree with your article, DUMB. One contrarian remark (which doesn’t excuse the behavior in your article), when regulators start to micro manage compensation they often focus on total cash compensation (salary and bonus) because there is plenty of peer data available. I believe this leads to bank looking to provide other forms of compensation to keep “cash compensation” low. Obviously this isn’t the case with the $2MM salary, but the dynamic contributes to the development of other perks and benefits.

  11. Hanlon

    Some of the points you bring up I agree with. However, the Midwest bank CEO that won’t let his traveling employees expense their meals while on the road for the company is just disrespectful.

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