The job of an investor relations professional can be difficult in this decade of high (and rising) executive compensation and low returns for stockholders.
Among the most challenging chores is explaining the discrepancies between the type of risks CEOs shoulder and the risks the unfortunate masses carry.
Every day, CEOs ask all sorts of people to assume risk. They ask bondholders to assume the risk that the company might default on its debts. They ask shareholders to assume the risk that the stock may plummet. They ask employees to assume greater risk on their retirement (replacing defined-benefit pension plans with defined-contribution 401K plans) and their healthcare (by asking them to open a health savings account, or to choose high-deductible policies, or to do away with health insurance altogether).
CEOs do take on a good deal of risk: they work long hours, assume significant responsibilities and stand a fair chance of being fired in a few years if things don’t pan out. But in many other ways, they’re insulated from risk the way a pampered royal child is insulated from mingling with the public.
Troll through proxy filings and you’ll find that CEOs today receive guaranteed bonuses and awards of restricted shares. You’ll find that many are protected from the risks inherent in old age, with guaranteed defined-benefit pensions and healthcare for life – no 401Ks or health savings accounts for these guys.
Michelle Leder, author of Financial Fine Print and proprietor of the proxy-snooping blog Footnoted.org, has unearthed a new way that top executives are being insulated from risk – at shareholders’ expense, of course. In an article in Slate, Leder notes that in recent months, ‘at least a half-dozen companies, including eBay and Nike, have disclosed in their routine [SEC] filings that they’re now protecting their executives from real estate market forces.’ How? By guaranteeing that the homes they sell in the frothy US real estate market will return a certain price, regardless of what the market will bear.
Last March, Electronic Data Systems CFO Bob Swan accepted an offer to become CFO of mega-auction site eBay. As you might expect, eBay picked up the costs of Swan’s relocation from Texas to California. As you might not expect, Swan also received a $700,000 ‘supplemental relocation allowance’. In other words, if his six-bedroom McMansion in Texas, for which he paid about $3.3 mn in 2002 and which was on the market this year for $2.7 mn, were to sell for less than $3 mn, eBay’s shareholders would make up the difference to a maximum of $700,000.
This is yet another example of wealth without risk. I’m sure eBay’s shareholders, who have seen the value of their investment fall by 35 percent in the past year, wish they could get that kind of deal.
Daniel Gross writes the ‘Moneybox’ column for Slate.
