Down To Business: Is Executive Pay Excessive?Down To Business: Is Executive Pay Excessive?

How much is a top executive worth? For that matter, how much is a top CIO, CTO, project manager, developer, or security expert worth? Most of us have set notions about what constitutes "excessive" or even "extravagant" compensation, as if private sector pay were dispensed according to a civil service schedule rather than the gyrations of labor supply and demand.

How else do you explain the hue and cry around stock option backdating? This much-maligned practice entails letting key employees exercise their options based on an earlier, lower stock price than the price on the day the options were granted. Backdating is illegal only if it isn’t reported properly. Otherwise, it’s been a way for companies, especially tech companies, to compensate highly coveted managers and technologists without breaking the bank.

Most of the media loathe stock option backdating not because it breaks the law, but because it’s seen as a ploy to enrich members of the muckety-muck club. This public loathing has far more to do with inciting class warfare than debating the finer points of generally accepted accounting principles.

When evaluating pay, better that we focus on job performance and the scarcity of premier job candidates than on absolute numbers. The San Francisco Giants last month signed Barry Zito to a seven-year, $126 million contract--the largest contract ever awarded a major league pitcher--because Zito’s been one of the winningest and most durable pitchers over his seven-year career and because of the dearth of quality starters on the free-agent market. Whether the Giants overpaid will depend on Zito’s future performance and marketability, not on historical comparisons to his contract.

Several years ago, when the U.S. president’s salary was doubled to $400,000, I recall our company’s cafeteria cashier describing the raise as "obscene." Of course, there’s no arguing that point with someone who earns near minimum wage, but when it comes to compensation, one man’s obscenity is another’s pittance. Perhaps we could attract a better class of politicians if we paid them something closer to a market wage.

Do you think you make too much money? Because some underling in your organization certainly thinks you do. Any coal miner, bridge builder, or other laborer who risks his life for a living would think you do, too. If salaries were just about the importance or perils of the work, teachers and nurses and power plant technicians and soldiers would be pulling down the big bucks. That they’re not doesn’t mean they’re any less critical; it just means that employers could find more of them at the pay they now earn. Water is cheap because it’s abundant. Gold is expensive because it’s not. Which is the more critical commodity?

information‘s 2006 National IT Salary Survey pegs the median base salary for CIOs at $126,000, with variable compensation bringing that figure close to $200,000. Are those folks overpaid? Hardly. Is Hewlett-Packard CIO Randy Mott, whose total package exceeds $15 million when factoring in stock grants, bonuses, and other incentives, overpaid? Before you snap to judgment, consider the $50 billion in HP shareholder value Mott has helped create over the past 18 months. Don’t think for a minute that lots of people could have filled his shoes for a fraction of what HP is paying him.

Conversely, Robert Nardelli was ousted as CEO of Home Depot this month after the board, pressured by shareholder activists, finally had enough of trying to justify his compensation package, which amounted to $225 million over his six-year tenure. What ultimately did Nardelli in wasn’t the compensation numbers as much as it was the stock price: Home Depot’s market cap has barely budged from what it was six years ago, despite the fact that sales and earnings have doubled. (Whether Nardelli’s $210 million-plus exit package is excessive is another story.)

When it comes to executive pay, there’s no shortage of gluttony and greed. But calls for caps and other artificial controls have more to do with another Deadly Sin: envy.

ROB PRESTON, VP/EDITOR IN CHIEF
([email protected])