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.