Abstract
The way in which CEOs are paid today is often at odds with the actual success of the business, leaving many executives being well-paid even when their ideas and their business acumen fail. In the case of individuals like Michael Eisner, the CEO of Disney in the late 1980s through the early 2000s, he enjoyed unprecedented wealth and pay, despite a less-than-stellar output and profits for the company. Though his pay was justified at the time, due to the tumultuous period that Disney was encountering, his eventual mistakes and overabundance of power left him with too much pay and control near the end of his tenure. Issues of board composition, risk-reward and short-term/long-term compensation in the wake of Eisner's success has led to the current glut of entitlement-based CEO pay, regardless of actual productivity and output for said company.
As figureheads and ostensible leaders of a company, the CEO (Chief Executive Officer) has a unique and vaunted position - the ability to elevate and determine their own pay, based on what may be arbitrary and nonsensical reasons. The way in which CEOs are paid today is often at odds with the actual success of the business, leaving many executives being well-paid even when their ideas and their business acumen fail. In the case of individuals like Michael Eisner, the CEO of Disney in the late 1980s through the early 2000s, he enjoyed unprecedented wealth and pay, despite a less-than-stellar output and profits for the company. Despite being paid reasonably less than some major CEOs, the question remains: just how much pay is too much, even for a CEO? Though his pay was justified at the time, due to the tumultuous period that Disney was encountering, his eventual mistakes and overabundance of power left him with too much pay and control near the end of his tenure.
After Walt Disney passed away, the Disney Company was coasting by on its own reputation, and had been running on smaller revenues and a below-average after tax return on equity - around 9 percent (Crystal, p. 353). As a result, Eisner, the former president of Paramount Pictures, accepted an unprecedented deal to come over to the Walt Disney Company and reverse their fortunes. The deal they worked out was a six-year employment agreement that offered substantial rewards for far more risk. Eisner would be paid $750,000 a year, frozen for six years, 2 percent of all profits after taxes in an annual bonus, and two million Disney common stock options with a value of $14 a share at the time (Crystal, p. 354). On the surface, this is an extremely good deal; much of the risk involves the fact that his own financial well-being required him to turn the company around, as he promised to do. He proceeded to do just that, turning a $14 share in 1984 to a $66 share in 1989, and quadrupled profits by the late 80s as well (p. 355).
This subsequent success made these high-risk pay packages pay off, making $7 million in bonuses each year during this period. Since Disney was also making incredible money, the shareholders did not seem to complain. However, the different Disney employees and producers started to complain. While they felt he deserved to get that money, that highly-public figure would always get brought up in new contract negotiations. Soon, he became the beacon for the millions everyone at Disney (and elsewhere) thought they should make.
Soon, the company's faith in Eisner would drop, or at least lessen substantially. Executives extended his stay at the company up to 1998, extending his deal and making it even riskier: the same $750k salary stayed until 1998, and bonus thresholds would increase (meaning he would have to make Disney profit three times as much to get the same kinds of bonuses he was getting before he joined the company) (Crystal, p. 360). However, Eisner's decisions during this era became much more controversial, and Disney's star started to fade. In the meantime, however, while Eisner's pay lessened slightly, it was still miles above most other CEOs, and still exponentially more than the average Disney employee.
These notions led to the resignation of Roy Disney, the vice president, in 2002. He felt that Eisner was ruling in bad governance, and that the company was now at risk. The board was claimed to be in the pocket of Eisner, or at least too weak to oppose him on any major decisions being made for the future of the company. In essence, his high pay was a result of his earlier saving of the company; the company then became too dependent on Eisner for its future decisions, which led to the aforementioned bad governance. Nepotism in appointing members of the board, as Eisner staffed it with his friends and family, demonstrated an incredible increase in power for the CEO - much more than he should have had (Glazier, 2006).
Eisner's handling of Disney money did not simply extend to the exorbitant bonuses that he received. When Eisner's friend, Michael Ovitz, was named president of Disney after its previous president, Frank Wells, died in a 1994 helicopter crash, Ovitz was fired without cause less than a year later. He was given an impressive severance package of $140 million, which was absolutely ridiculous in the eyes of shareholders since he had barely governed or held any responsibility during his tenure at Disney. Though the Disney Board of Directors was given a "win" in the lawsuit that was levied against the company by the shareholders, the court reminded the corporate board that such behavior would not be tolerated in this day and age (Glazier, 2006).
Eisner's behavior, and the issue of his pay, touch on very prescient issues that exist within the realm of business ethics. According to the Nicomeachean Ethics by Aristotle, the leader's role within an organization is to make an environment in which everyone can reach their potential, foregoing their own personal gain to pave the way for the success of one's followers (O'Toole, 2012). With this in mind, the distribution of rewards between CEOs and the rest of the company, especially in this day and age and with Eisner as an example, seems excessive. between 1994 and 2004, Eisner is said to have amassed around $285 million from the Disney Board of Directors, an incredible sum for a CEO of a company he was not necessarily guaranteeing success for (O'Toole, 2012). While Aristotilian ethics are not necessarily the most detailed barometer for business ethics and executive compensation, its principles are very on-point, as distributive justice is the primary issue at hand.
The incredible pay of executives is a relatively recent phenomenon, at least at the levels at which we are experiencing now. The extended bull market of the 1990s saw CEO pays skyrocket, as executive compensation at public companies rose to four times their initial height; the average CEO pay became $14.7 million from $3.5 million (Bebchuk and Fried 2004, p. 1). Option-based compensation also rose, with the insertion of stock options increasing exponentially in this time, growing far beyond that of other employees of the same company. By the year 2003, CEO pay became about 500 times that of the average worker at that company (p. 1).
Eisner's particular case brings up the question of how high actual CEO pay is too high? Though "paying the median" is the typical barometer for compensation, it is not always the most accurate or fair measure for board pay. Often, CEOs are paid based on comparison with other CEOS in similar fields; when Eisner's own exorbitant pay happened as a result of Disney's success in the late 80s, the 1990s were filled with CEOs and the like elevating their own pay to more or less keep up with Eisner himself. The problem with that was these executives weren't Eisner - the risk was often greater to the company, but their pay wasn't based on risk, but simple reward. Even Eisner's own pay did not accurately reflect the level of success that Disney was experiencing near the end of his tenure, but the pay itself remained.
In order to address these problems, boards need to have greater power, and the willingness to properly allocate pay to compensate for what they get out of a CEO. The ability to determine the amount of pay a CEO should get for short-term results and long-term results is one of the most important determiners of equitable pay for executives. Both short-term and long-term results depend on much different factors, and not understanding the difference between them can result in a much more skewed median that the CEO is paid to (Crystal, p. 362). Understanding how other senior officers of the company get paid is also important, as they must determine whether or not to increase their pay accordingly, or subscribe to the idea that the CEO is a "Great Man" who will single-handedly bring prosperity to and guide the company. The media must also be addressed; claims of overpay can hurt a company, and so both keeping executive pay reasonable and being mindful of media coverage of these round-ups can help to create an ethical means of compensation.
The biggest problem with executives and boards of directors, currently, is that their formation is not related to the performance of a company; in fact, different sizes and compositions of boards can dramatically affect the quality of decisions on such important issues as CEO replacement and executive compensation. The sooner that this assumption is dispelled, the more quickly the problems with unequal CEO pay and board composition/nepotism can be addressed (Hermalen and Weisback, 2003). Currently, the inflated nature of CEO pay is based on an entitlement philosophy, which is actually a far cry from Eisner's initial pay - the high risk was attuned to just how badly Disney needed Eisner to turn things around for them. It provided incentive for him to work even harder to fix the company; his success paved the way for entitlement-based compensation in other executives, which became the real problem with larger companies.
The primary issue regarding ethics in executive compensation is not necessarily that a human being should not receive that much money, but rather whether or not they did that proportion of the work commensurate to said pay. The processes that set pay have changed dramatically in the past few years, with the Michael Eisner model offering high-risk, high-reward CEO pay. Because of his incredible success during a time at which Disney was floundering, Eisner managed to set records for his pay, and establish a dangerous precedent for executive pay that encouraged high executive compensation regardless of the success of the company.
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