The huge, global conglomerate – General Electric - reported this week that it paid its CEO, Jeffrey Immelt, $14.2 million in total compensation for the year just ended. In an extraordinary move, GE also cancelled $7.3 million in previously awarded stock incentives because the company failed to meet internal benchmarks for total shareholder returns. So, in effect, Mr. Immelt's take home pay was cut in half to $6.9 million. In exchange for Immelt’s services, GE is getting a bargain. While Immelt does not have the public profile of his predecessor, Jack Welch, he generally receives high reviews from analysts, stockholders and business professors.
To put this in perspective, the median CEO compensation for S&P 500 companies was $8.5 million in 2006 (the most recent year results are available). How does GE compare to the typical S&P 500 company? It is bigger ($170 billion in revenues). It is more successful ($22.5 billion in net income and 20% return on equity). And, GE is far more complex – 327,000 employees across the globe operating in a wide spectrum of businesses. GE is a technology, media, and financial services company -- producing everything from jet engines and light bulbs to the NBC Nightly News.
Experts point to market forces (CEO pay is linked to the availability of suitable talent to assume the role) and pay for performance schemes (As the company performs, so goes the pay of the CEO). But by these measures, Immelt’s compensation should be significantly higher. It appears that the compensation committee of GE has another principle at work in setting Immelt’s pay – a “fair and reasonable” principle that often is missing in the boardroom as deliberations unfold about executive compensation.
How may CEO candidates could actually run GE as well as Immelt? Not many. The question is not how many think they can but how many actually can.
What is extraordinary is how little Immelt makes compared to the celebrity CEOs – who usually lead smaller, less complicated and diverse businesses. Steve Jobs of Apple made $647 million in 2006. Terry Semel, who failed to transform Yahoo, still made $174 million in his final year as the CEO of Yahoo. And, the CEO of AT&T made $49 million. It is hard to understand why Ed Whitacre of AT&T is worth seven times more than Immelt.
The critics have good reason to complain about CEO compensation, which often defies the logic of long-term success, company scale or operating complexity. The same critics should argue for a pay raise for Jeffrey Immelt.
1 comment:
Without question, more attention should be paid to situations where CEO pay is rational. It would make it a lot harder for the irrational actors to get away with claiming the the market is responsible their ridiculous pay packages. I wonder what Immelt himself would say on the subject...
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