Compensation: How Much Is Too Much?

Last year, Ivan Seidenberg, Verizon’s CEO, made about $20 million in salary, bonuses, restricted stock and other compensation. During the same period, shareholders watched their stock plunge more than 25 percent. Bondholders got hit hard, too, when credit agencies downgraded Verizon’s debt.

For years now, top employees of big companies have been enjoying crazy compensation without any consistent relationship between the long-term profitability of the business and what they earn.

What’s a board of directors to do?

I’ve had very limited experience with public companies, so I won’t pretend to have any expertise in this area. But I’ve been involved at the top of dozens of profitable, multi-million-dollar private businesses, and I do have a feeling for what’s fair on the private side.

Here are my thoughts:

1. I don’t see why any executive should have guaranteed compensation of more than about $1 million a year. Someone who takes a business from losses to very substantial profits might merit a much higher level of compensation than that, but it should be tied into the extra long-term profitability that he creates.

2. As a rule of thumb, top execs who achieve sustainable profitability breakthroughs deserve a significant cut of the profits. Those profit bonuses should be marked against some reasonable benchmark of profitability. If, for example, the company had earned a total of $10 million over 10 years, the bonus structure should be applied to profits that exceed $1 million (the average of the long-term baseline that existed before the exec took over).

3. I don’t think execs should be given stock or stock options as bonuses. They should sometimes be allowed to buy stock at market price, but not get it at the expense of the company’s regular investors (who paid a fair market value).

Personal Note: A few years ago I voluntarily agreed to a change in the compensation package I had for many years with an important client. The company had become super-profitable and the top guys were getting a lot of money. We designed a new formula that was based on the recommendations I’ve just made: a substantial but reasonable base plus a modest percentage of profits that exceeded a long-term benchmark. Although the new deal resulted in my making a lot less money for several years, I’ve come to think it was the right thing to do, because (a) it’s still a lot of money, and (b) I feel like I deserve everything I’m getting.

I wonder if Mr. Seidenberg feels that way.

Ivan Seidenberg’s $20 million compensation package seems way out of line with the performance of Verizon under his leadership. Yet, it’s by no means outrageous by recent U.S. public company standards. CEOs and other top executives of some of the bigger Internet businesses have been paid multiples of this sum – often for leading their badly managed businesses into insolvency, bankruptcy, or commercial oblivion.

In my view, most CEOs (including most CEOs of sub-billion-dollar businesses) should be satisfied with base salaries of $150,000 to $350,000. And for big businesses that are heavily in debt or losing money, the guaranteed compensation should be as low as possible – just enough to attract the right person for the job.

I’ve always taken most of my compensation on a profit-sharing basis. If the company wasn’t making any money, I figured, why should I?

Most ETR readers are neither CEOs nor board members of billion-dollar businesses. Executive compensation issues for them do not get into the $20 million range. So for small- and medium-sized private businesses, what is appropriate compensation? Here’s a ballpark guide for the buck-stops-here person, the one who is chiefly responsible for profits:

  • For a fledgling business (one that is not yet profitable and has less than $1 million in revenue): between $50,000 and $100,000.
  • For an un- or not-yet-profitable business doing less than $10 million in revenues: between $50,000 and $150,000.
  • For a profitable business doing less than $10 million in revenues: a base compensation of between $50,000 and $150,000, plus a profit incentive of between 1 percent and 10 percent of net profits above some benchmark profit target.
  • For profitable companies with revenues of $10 to $100 million: a base compensation of between $100,000 and $200,000, plus a profit incentive of between 1 percent and 10 percent of net profits above some benchmark profit target.
  • For profitable companies with revenues of $100 million plus: a base salary of between $150,000 and $250,000, plus the same profit incentive.

These are guidelines – not hard-and-fast rules – and they are based solely on my experience. When it comes to making specific decisions for your business, you would have to balance them against your own experience and, most importantly, what your industry is paying top people.

In structuring CEO compensation, however, the basic principles are easy to understand:

  • A really good CEO must have confidence in his game. If he has confidence, he should be willing to take a modest base salary so that most of his compensation (50 percent to 80 percent, perhaps) will come from his performance. If he’s not willing to do that, he doesn’t believe in the business, himself, or both.
  • The incentive part of a CEO’s compensation should be related to the marginal profits he creates – the extra, above-average profits that occur because of programs, promotions, and protocols that he puts into place.
  • Although the base compensation should be as low as possible, it should be high enough to attract good talent. This is particularly necessary when the business is foundering (or floundering). During troubled times, ironically, the guaranteed component of the CEO’s compensation may have to be higher than normal … because the smart CEO will see that profits – even under great leadership – may be several years away.
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