When is an exec worth a big payday?

Patricia Kitchen | Change@work

11:57 AM EST, January 18, 2008

It may seem insane and offensive that executives who preside over the meltdown of their companies get to walk away with millions, as is the case with the chief executive of Countrywide Financial Corp, Angelo Mozilo. Let's see how that's allowed to happen:

A top dog's compensation, including severance package, is determined by the company board of directors, specifically the compensation committee. Hal Lazarus, professor in the Zarb School of Business at Hofstra University, says board members are often chosen from the chief executive's Rolodex -- even after the Sarbanes-Oxley Act, which, among other things, called for new board standards. Some companies "do it the old way and do not see a high correlation between performance and compensation," he says.

Lazarus has served on at least 15 corporate boards and says that he does see many local companies "behaving responsibly." But, Lazarus adds, he sees the old-boy network still at play at companies that resist appointing outside board members -- those who might challenge the makeup and size of compensation packages.

He says he was among several board members dismissed many years ago; he believes his dismissal was a result of his suggestions for more sound management practices and, in his role as chairman of the compensation committee, his questioning of the chief executive's compensation in relation to performance.

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He says there is often "insufficient objectivity," but board members don't necessarily okay a lucrative package out of friendship alone. In many cases, as leaders themselves, they empathize, thinking, "I've been in that position. I understand how terribly difficult it is to be an executive." "And it is," says Lazarus.

"And it is," says Lazarus.

Boards may also sign off on generous severance packages to attract a new chief executive who is brought in to turn a company around, says Tom McManus, a management consultant and attorney in Southampton. The newcomer is aware he is coming into a shaky situation, and his reputation -- as well as future earning power -- is at risk. As a result, he will often demand, and get, a lucrative golden parachute.

Still, if improvement in executive accountability is on the horizon, McManus says, it's to be found in greater reliance on transparency, which itself is brought about by technology and globalization.

"It used to be easier for a company to commit a mistake and then hide it," says McManus, an adjunct professor at Hofstra. But with the freer flow of information, "they can't keep information as readily confidential as they could in the past."

Companies are also being prodded by institutional investors pressing for more data on executive pay and perks, he says.

Still, both McManus and Lazarus say, some executives are worth every penny -- because they create significant value.

McManus points to Lou Gerstner, who masterminded the major overhaul of IBM. "There's almost not enough money in the world to pay a guy like that," he says.