Sunday, January 29, 2006

Maytag CEO Ralph Hake: The Poster Child for What’s Wrong with CEO Pay

Rarely in this blog will you see me directly criticize an individual’s compensation arrangements but this example epitomizes why shareholders are angry about the state of CEO compensation today. It is these types of incidents that lead to generalizations about executive pay and the resulting activism, legislation, and misguided reactions. We cannot conclude that all CEO pay is wrong, or that most CEO pay is wrong, but I can conclude that Ralph Hake’s compensation arrangement, in light of his destruction of Maytag and its treatment of its customers, is unacceptable. The members of the Compensation Committee of the Board of Directors should be held accountable for this. Here's why.

The CEO joins the company in June 2001, proceeds to destroy two-thirds of the company’s market value over the next 4 years costing the shareholders $1.6 billion. In return, he gets compensation of $9.4 million by having the company taken over by Whirlpool Corp. This describes the situation with Maytag's CEO Ralph Hake. By driving the company into the ground, Maytag became an easy takeover target, triggering Mr. Hake’s golden parachute payments. This, of course, is on top of his multi-million dollar annual pay package.

I can see one source of the problem: the Charter of the Compensation Committee, dated 11-11-04 and posted on Maytag’s website, says:

“The Committee’s basic responsibility, on behalf of the Board, is to assure that the Chief Executive Officer and senior executives of Maytag and its wholly owned affiliates are compensated effectively in a manner consistent with the stated compensation strategy of Maytag, internal equity considerations, competitive practice, and the requirements of the appropriate regulatory bodies.”

What’s missing? How about the obvious: that the Committee’s primary job is to ensure executive compensation supports shareholder value creation. The Committee members seem to have satisfied their Charter. Unfortunately, it’s the wrong Charter.

Not only did the shareholders pay dearly, but during this time Maytag’s product quality plummeted, costing customers millions of dollars. I don’t see any mention of “customer” in their Charter either.

That Maytag repairman is really going to be the "lonliest man in town" now because he'll be out of a job while Ralph enjoys his newfound millions. This is why people are angry about executive pay.

Thursday, January 19, 2006

Pay for What Performance?

"$400 awarded to each Alaska Airlines employee."

This headline could have just as easily read “Alaska Airlines Pays $4 million in bonuses for providing subpar customer satisfaction 1/3 of the time.” At the schools I attended, missing 1/3 of the answers was a score of 67% -- a “D” -- and I don’t remember any bonuses being paid for that.

The other interesting tidbit in this article is that Alaska missed its on-time goals 100% of the time in 2005 when compared to other airlines. But the company has nipped this problem in the bud. Rather than comparing itself to airlines with whom it competes in the marketplace, the company will now pay bonuses based on the percentage of flights it “expects to arrive on time each month” in 2006.

Incentive compensation design is a fascinating topic and pay-for-performance is one of the key issues in executive pay right now. I wonder how this message will play to Alaska Airlines shareholders: "We paid our employees an additional $4 million for failing 1/3 of the time on one measure; we failed 100% of the time on another measure and rather than fail 100% of the time again this year, we are lowering the goal so that we have a better chance of paying ourselves a bonus in 2006.” That is the sort of thing that shareholders at other companies are mad about.

I do not own shares of Alaska Airlines but do own shares of Southwest Airlines where customer satisfaction and on-time performance are not a basis for extra pay but a daily expectation and requirement. I'm unable to paste the stock price comparison chart of ALK vs. LUV into this blog but if you are interested you should take a look at it on Yahoo! Finance. A picture truly is worth a thousand words which is much too long for a blog, so I'll just say that some ALK shareholders may be asking for their $4 million back.