When CEOs Get Huge Pay for Shoddy Performance

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted November 7, 2007.

Apologists for our current economic order have a ready rejoinder whenever anyone dares suggest that top CEOs just might make too much. These execs, comes the retort, are creating wealth. They deserve a decent chunk of whatever wealth they create.

E. Stanley O'Neal, the embattled Merrill Lynch CEO forced to resign last week, could certainly claim to have "created" wealth back last year when critics blasted his $46.4 million take-home. Merrill made $7 billion wheeling and dealing in 2006, over triple the $2.2 billion the company raked up in 2002, the year O'Neal became Merrill's CEO.

But this year, unfortunately for O'Neal, Merrill Lynch lost $2.3 billion in just the third quarter alone.

So what does the short, sad story of E. Stanley O'Neal tell us, in the end, about CEOs and wealth creation?

Let's first acknowledge that top executives can indeed help create wealth -- if they're serious about building truly effective enterprises. Executives can help nurture effectiveness, management researchers tell us, by fostering enterprise-wide teamwork, by promoting initiatives that tap employee wisdom and grow employee skills.

But all this nurturing can take time, much too much time for executives larded with princely incentives to show results fast. Not surprisingly, few of our contemporary big-time CEOs take this slow-and-steady, effectiveness-building approach to wealth creation.

Instead, top executives gamble. They roll the dice with big, bold business moves. They might orchestrate a major buyout, for instance. Or order a huge downsizing. Or plow corporate cash into incredibly complex speculative financial instruments.

Stanley O'Neal, as Merrill Lynch CEO, took all three of these gambles. He started out by axing employees right and left, in the process shredding the little that remained of his company's no-layoff "Mother Merrill" institutional culture.

Then O'Neal speculated. He boosted "Merrill's exposure to the volatile and ultimately toxic market for complex debt instruments" from $1 billion to $40 billion, in just 18 months, right as the sub-prime mortgage market was beginning to melt. Oops. In quick order, Merrill would see the biggest losses in the company's 93-year history.

Finally, with Wall Street's walls beginning to crash down upon him, O'Neal played his third wealth "creation" card. He tried to finagle a last-minute merger between Merrill and the Wachovia bank.

For O'Neal, this merger made eminent sense. Under his CEO contract, any merger that led to his exit from Merrill's top executive suite would entitle O'Neal to "a potential $274 million payout."

O'Neal, alas, had waited too long to begin his merger dance. The merger scheming blew up in his face. O'Neal will now to settle for an exit package most analysts peg at $161.5 million, but could, says Reuters, "easily top $200 million."

Whatever sum O'Neal eventually reaps from his resignation will come, of course, on top of the $160 million his five years of CEO labor have already earned him.

Shad Rowe, the president of the watchdog group Investors for Director Accountability, sees all this as nothing short of disgusting. O'Neal, he charges, "was paid a tremendous amount of money to create a loss that is mind-boggling, and he obviously took risks that should never have been taken."

But why should anyone be shocked? Top executives today routinely take outrageous risks because, in today's Corporate America, outrageous risks can pay off in outrageously huge rewards. Sane people don't take huge risks for small rewards. Huge rewards, on the other hand, can leave nearly anyone giddy -- and greedy.

That won't change until we start, as a society, reining in CEO pay. In Congress, Rep. Barbara Lee from California last month proposed a step in that direction, a bill that would deny corporations tax deductions on any executive pay that runs over 25 times the pay of a company's lowest-paid worker.

E. Stanley O'Neal, for the record, last year pocketed over 2,300 times more than workers earning $20,000 a year.

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Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.