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How Some CEOs Cheat Their Way To Higher Pay

By Alan Pyke on September 13, 2013 at 2:32 pm

"How Some CEOs Cheat Their Way To Higher Pay"

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CEO pay 3x2CEO pay schemes tied to company performance are routinely gamed by some of the largest companies in the United States in a practice that ends up bilking taxpayers of billions of dollars, according to new research. Some companies go even further, fluffing up their reported profits in order to ensure performance-based bonuses get paid.

Substantial portions of executive compensation are contingent upon the company hitting some threshold of success for the year such as growth in stock price. Dozens of the largest American corporations routinely set performance targets so low they’re effectively meaningless, including Walt Disney and Valero Energy. Researchers at Indiana University say that companies listed on the S&P 500 index hitched their performance-based compensation to earnings estimates 2.6 percent lower on average than what professional analysts expected. Such under-targeting amounts to a guarantee that “management doesn’t have to meet market expectations in order to get paid,” one expert on executive compensation told Bloomberg. Seventy-four companies have been chronic offenders, under-targeting earnings more than half of the time since 2006.

Wynn Resorts Ltd. offers a more egregious example of the under-targeting practice. The casino company founded by major GOP donor Steve Wynn made his 2011 and 2012 bonuses contingent on earnings that were actually lower than the previous year’s, effectively guaranteeing Wynn a combined $19 million in taxpayer-subsidized bonuses over two years.

Some abuses of the performance-based compensation system are more flagrant than the under-ambitious targeting that researchers identified. When Exelon Corp., the country’s largest operator of nuclear power plants, fell six cents per share short of the annual performance level that would trigger $20 million in cash bonuses to executives, the company simply “tacked on” $85 million in profit it hadn’t earned in order to ensure the payouts happened. One Tennessee-based energy company paid its CEO a million-dollar performance bonus for delivering “a higher percentage increase” in stock price than the company’s competitors, even though the company’s stock lost 6 percent of its value.

Because executive compensation in the form of stock is tax-deductible for companies under a 1993 law, and much of the performance-based compensation executives draw is paid in stock, such gaming of performance targets ends up hurting taxpayers. Economist and former Labor Secretary Robert Reich said taxpayer losses due to manipulating performance targets are measured in the billions of dollars. A proposal from Sens. Jack Reed (D-RI) and Richard Blumenthal (D-CT) would end the taxpayer subsidy of stock-based CEO pay, and thereby remove some of the strongest incentives financial company executives have to commit or ignore fraud.

The push to get CEOs their millions no matter what may help to explain why so many failures and fraudsters keep ending up on annual lists of the best-paid executives.

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