One of our favorite reporters, Michael Hiltzik, writes a very important story about what the new tax bill reveals about the failures of CEO “incentive” pay.
The big news Friday on the executive compensation front is that Netflix is converting some of its “performance-based” pay for its top executives to straight salaries, thanks to the recently-passed tax bill.But people may be taking the wrong lesson from the change. On the surface, it looks like the five executives covered by the change are getting big raises thanks to the tax bill. But the reality is a bit more complicated. And what the new policy at Netflix really tells us is that the old “performance-based” executive compensation system always was a sham, anyway….[Under the Clinton-era rule that exempted “performance-based” pay (stock options) from the ceiling on deductibility companies and board comp committees became] adept at tailoring performance targets to guarantee maximum pay for top executives. The definition of “performance” became suspiciously flexible, as if corporate boards first decided how much to pay their executives, and then cobbled together performance targets to make sure they hit the mark. A great example was the pay of IBM’s chief executive, Virginia Rometty.
As we reported, in 2016, the fifth year of her tenure, IBM’s revenue declined 2% to $79.9 billion; the company turned in four more quarters of shrinking revenue, making 19 in a row; and its full-year profit was down 11% to $11.9 billion. Based on this “performance,” Rometty’s bonus rose to $4.95 million from $4.5 million — her largest bonus ever.