Ceos Enjoy New Salary Security

Image: Kagan McLeod

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After 20 years of writing about egregious C.E.O. behavior, I sometimes think there is nothing left to say. Salary inflation of Weimar Republic-like proportions, stratospheric bonuses, falsified financial statements, backdated stock options, and now the subprime crisis—I’ve almost lost the capacity for outrage. So what if Citigroup elected to give the departing Chuck Prince a $10 million bonus after he presided over the bank’s disastrous expansion into

the subprime-mortgage market? So what if Angelo Mozilo, the co-founder and C.E.O. of Countrywide Financial, exercised more than $100 million worth of options shortly before his firm’s stock price collapsed? And so what if Stan O’Neal, Merrill Lynch’s former boss, left the company with $162 million a mere week after it reported the biggest loss in its history? Self-enrichment on the scale of a Roman emperor is precisely what I expect from big-time C.E.O.’s, especially Wall Street ones.

Still, you have to wonder: Given all the scandals they have endured and all the opprobrium directed at them, how do they continue to get away with it? Part of the answer is to be found in recent changes in their employment contracts that make it extremely difficult to fire them, however badly they perform. For all the talk of C.E.O.’s taking responsibility and earning pay based on their performance, the typical corporate leader now has more job security than an East German factory manager during the Soviet era. However poorly a company performs, firing its C.E.O. is virtually impossible, largely because of this new breed of contract. All too often, the only way a board of directors can bring in somebody new is to ask the current chief executive to depart on friendly terms and pay him a king’s ransom.

The proliferation of C.E.O. contracts was no accident. They originated in the 1980s and ’90s, as a reaction to earlier efforts to rein in pay. After Enron, the Sarbanes-Oxley Act tried to codify C.E.O. responsibilities by, for instance, forcing them to sign off on company accounts. Corporate bosses responded by quietly demanding individual contracts, which, in many cases, were drawn up by their own lawyers and accepted by their boards with no outside review. Often, the restrictive and self-serving terms of these contracts came to light only when it was too late for shareholders, or anybody else, to do anything about them.

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