The (Canadian) Globe and Mail launches a screed about executive pay thusly:
Bosses – are they worth it? A series of corporate-world disasters over the past decade – the internet bubble, Enron, banks – suggests that a lot of executives are overrated.
Enron is never mentioned again in the article so we don’t know what proof she has to support her position that Enron’s compensation was proof that executives are overpaid. However, I’ll take a stab at talking about Enron executives’ pay.
First, if you have a problem with executives’ compensation, take it up with Towers Pirren, a consulting firm with whom Enron devised its pay packages. Like everything Enron did, auditors and lawyers were circling like hawks. Enron, in its zeal to be transparent, loved to spend money on outsiders and advisers. McKinsey, Arthur Andersen, and Vinson and Elkins all advised Enron. Of course the company would outsource the pay packages.
In a 1999 proxy statement, Enron’s board said its goal was to set executive pay in the 75th percentile of its peer group. It’s not completely clear whom the board included among its peers. It did not expressly list its peers, but did compare itself to Duke Energy, Dynegy and PG&E to assess overall corporate performance.
Thus it is difficult to know if Enron executives were objectively overpaid. Were I to design a study on the situation, I would define Enron’s peers as those alike in market cap, number of employees, and income, then try and figure out what they were paying. The companies listed above were smaller than Enron; I would not be surprised to learn Enron paid more than them because Enron was not a peer.
In its proxy statements, Enron’s board said its “key performance criteria” for executive compensation included, “funds flow, return on equity, debt reduction, earnings per share improvements and other relevant factors.”
By these benchmarks, Enron’s executives did well. Between 1996 and 2000, revenue increased to $100.8 billion from $13.3 billion. Enron’s earnings per share grew to $1.22 from $1.12. Reported earnings climbed to $979 million from $584 million.
The compensation of the top-earning five Enron executives (Ken Lay, Jeff Skilling, Stanley Horton, Mark Frevert, Ken Rice) was inexorably tied to the health of the company. See for yourself:
|Top Five Executive Salaries||$3.04||$3.13||$3.62||$3.80||$3.61|
|Top Five Bonus Payments||4.70||1.85||9.46||11.30||17.55|
|Top Five Stock Grants||29.71||62.51||54.74||81.40||85.61|
|Top Five Total Compensation||37.46||67.48||67.82||96.50||107.67|
Eighty percent of their compensation was stock. Their livelihoods depended on that stock. The best interest of the company was their own best interest – which is how it should work. Compensating executives with stock is supposed to cement allegiance to the company, keeping them there for a long time (thus the vesting scheme) and doing their best to keep the stock price high.
Between 1996 and 2000, the average chief executive salary and bonus increased by 24% to $1.72 million, according to a Forbes study. Total CEO compensation, including stock options and restricted stock grants, grew 166% to an average of $7.43 million. But look what the top five Enron execs were making.
Their salaries grew only 2.6% from 1996 to 2000. Their bonus payments grew 16.55% from 1996 to 2000. These two figures are well below their peers’ compensation. Their stock grants grew by 85.51% in the same time period – again, below their peers’ 166% figure. At the same time, Enron’s reported earrings grew 97% and revenue increased 99.8%.
That is what you call an argument that Enron’s execs were underpaid.