Looking for CEO’s in All the Wrong Places

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeThe August 20, 2009 article by Reuter’s journalist Lilla Zill (“AIG chief’s salary structured to reflect risk“) says “AIG, the bailed out insurer whose pay practices sparked outrage earlier this year … said it will pay Benmosche, who became CEO on August 10, a salary of $3 million in cash and $4 million in fully vested stock. He also could receive a bonus valued as high as $3.5 million.”

We wonder what the message is when the government’s pay czar approves such a package.

Let’s start with the basics. The IRS limits deductibility of salary (not related to performance) to $1 million per year.  (You remember Section 162(m), I am sure!)  Benmoshe’s salary is 3 times this amount.  Could this signal a coming change in the tax code?  It is difficult to believe that when one government authority says pay only $1 million and another approves an amount 3 times that large there isn’t something else in the works. Undoubtedly the unintended consequences of 162 (m), which resulted in most companies piling on stock options and other short term incentives to entice executives, have come home to roost.  We can only hope for greater foresight when changes are made in the future.

Benmosche retired from MetLife in 2006 at the age of 65.  Now at 68 he has taken up the reins at AIG. (The article suggests that his AIG pay is in line with his pay level at Met).  But did the government and AIG look in all the right places for a new CEO? In our experience, a company in turnaround situation (and certainly AIG qualifies for that category) needs a CEO who is willing to be paid for performance.  To get a company back on the right track, the Board needs the CEO to focus on near-term needs, using incentives to reinforce the correct behaviors. 

Certainly there are performance incentives in the AIG package, but the base salary is high enough, perhaps, to make the incentives less incentivizing.  We aren’t surprised that AIG was required to pay a high base to get a CEO.  Just look at the last guy, Liddy, who took the job for $1 and was mercilessly grilled and browbeaten by Congress and vilified in the media. Who the heck would want that job, especially for one dollar?  Perhaps for Benmosche, $3 million will help to thicken his skin.  

It is interesting to look back a few years, well quite a few years, to the late 1970’s when Lee Iacocca was wooed by a near-bankrupt Chrysler Corporation to help with a turnaround. Having been fired from Ford, perhaps Iacocca felt that Chrysler was the best option out there and took on the challenge for $1.  Iacocca approached Congress for a bailout (in this case a guarantee of loans rather than a loan itself) and was granted a reprieve.  That, coupled with significant concessions from unions, helped to get Chrysler back on the right track. By 1986 Iacocca’s pay at Chrysler had topped $20 million.

Now that was some time ago, but I don’t recall the same level of browbeating and general anger on the part of Congress toward Iacocca as we saw leveled at Liddy.  In fact, Iacocca’s biggest claim to fame is his leadership in Chrysler’s turnaround, driving that company to phenomenal growth and innovation.  It is a sign of the times, we suppose, that Liddy didn’t get such white glove treatment; either that or the fact that Barney Frank wasn’t elected to the House until the early 1980’s. Perhaps by then Iacocca had already shown that Chrysler was on its way to new prosperity, giving Mr. Frank nothing to grumble about.

Contact Grahall’s Editorial Director at edie.kingston@grahall.com


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