Corporate Gigantism

(cc photo by ginnerobot)

(cc photo by ginnerobot)

Here’s a little slice of corporate life courtesy of Yves Smith:

Brief synopsis: Kraft acquires the 200 year old British confection-maker Cadbury after a heated battle. The chairwoman and CEO Irene Rosenfeld (already not a good sign, best practice is to separate the two roles) was awarded a 41% pay increase, bringing the total to $26 million for 2009 for her “exceptional role” in the Cadbury transaction, as well as her “commitment to fiscal discipline.

Huh? Doing deals is part of a modern CEO’s job. Unless her role was SO exceptional that it saved Kraft several million in deal fees, this just looks like a trumped up excuse. It is far too early to tell if the Cadbury acquistion was a good deal or not, thus special bennies look mighty unwaranted.

Indeed, the board looks like is was snookered (as in how would they know how “exceptional” her role was? Those reports would only come from her or staff and advisors loyal to her; the board most certainly not involved enough in transaction details to have an informed view.

The punchline is that Kraft actually screwed up. Part of their plan for Cadbury involved closing off the company’s pension plan but there’s “an obscure clause in Cadbury’s pension trust deed that makes it almost impossible to close the scheme.” As a way ’round this obscure clause, they’ve issued an ultimatum to employees, threatening them with a pay freeze unless they “voluntarily” agree to opt out of the pension plan. Point being that no matter how obscure the clause may or may not have been, this is supposed to be part of your due diligence before you buy a company, to say nothing of “exceptional” performance.

At any rate, there seems to be a serious incentives mismatch whereby bigger companies pay their executives more, creating strong pressure to do mergers and takeovers even in the absence of genuine economies of scale.