July 28, 2002

Once Upon a Time, a Restless C.E.O. . . .


Welcome to story time in corporate America.

The old story went like this: chief executives were in such demand that they were apt to jump ship at any moment.

The new story says that the scrutiny of large companies has caused some C.E.O.'s to consider resigning and others to balk at a promotion to the corner office.

The next story is already emerging. It says executives will begin quitting in droves if boards force them to hold on to their company stock in an effort to tie the executives' pay to their company's long-term health.

The storytellers have most often been the executives and the recruiters and pay consultants they hire. By suggesting that the job market for chief executives is fluid, the tales of executive wanderlust have conveniently offered an economic rationale for enormous executive pay. The evidence, however, is about as impressive as the wardrobe of the emperor in that other fairy tale.

The job of C.E.O. is fabulously attractive, allowing somebody to lead thousands of people, often in an organization where they have spent years. Few people leave voluntarily before they are ready to retire. Surprisingly few have even been willing to leave one corner office for another elsewhere.

This is a crucial point at a time when policy makers and corporate leaders are both struggling to stop the bleeding on Wall Street and to help the fitful economic recovery. It means that reforming executive pay a central part of re-establishing corporate America's credibility may not be nearly as hard as some people think.

Set that aside for a moment, though, and return to the first story, the one about jumpy C.E.O.'s ditching one company for another.

Since 2000, a year in which executive turnover spiked, 77 of the 200 biggest companies have hired a new boss, according to Pearl Meyer & Partners, a compensation consulting firm in New York. How many of those companies had to do so because their chief executive took another corporate job? Two.

David M. Cote left TRW for Honeywell, and John H. Dasburg left Northwest Airlines for Burger King. That was the sum total of the wanderlust.

Most departing chiefs retired and remained on their company's board, according to news accounts. A good number were forced out.

Yet many companies, including USX and Verizon, lavished their executives with so-called retention bonuses. Dozens of others cited retention to justify big pay packages, even as was the case at Enron recently when the executives could hardly expect to be sought-after candidates for other jobs.

The new version of the myth says the recent criticism of corporate America has turned the chief executive's job into an unappealing one. David F. D'Alessandro, the chief executive of John Hancock Financial Services, recently said that he had run into a peer at Yankee Stadium who told him: "I'm thinking of actually getting out, retiring. I didn't sign up for this."

There is no reason to doubt Mr. D'Alessandro, but don't expect the unnamed executive to make good on the threat. In fact, check back six months from now to see if anybody running a healthy company ceded his power and perks.

The idea that executives have little loyalty, however, serves an important political purpose. It allows them to argue against a serious idea for altering executive pay.

Senator John McCain, Republican of Arizona, has proposed requiring top executives to hold all their company stock as long as they are in their jobs. Congress is unlikely to adopt the plan, but some analysts think that boards of directors might enact milder versions of the policy on their own. Executives have begun to fight the effort, saying that talented leaders would quit after their stock price had risen, sell the stock and find new work.

If boards are wise, though, they will realize that finding a new company to run is not easy. Bank One and Citigroup already have stock-holding rules for top executives, and neither has suffered an exodus. Boards can also backload pay packages, giving executives an incentive to stay.

The economic theory needed to design such a contract is fairly basic. Boards and investors simply have to decide that they will not bend to executives' wishes as often as they did in the slap-happy 1990's.

The idea is not perfect, of course. Some executives, anticipating a big stock decline, will still decide that quitting and selling makes more sense than sticking around to receive more shares. Should anybody really be worried, however, if a company loses an executive with that mind-set?

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