When businesses are going well, we're happy to reward management, but it seems many are being rewarded for poor performance.
Management bonuses are often contentious, but when business is going well they are often waved through without any fuss. Now many businesses are struggling, and disappointing results are causing shareholders, employees, and politicians to start taking more notice.
This is particularly true when businesses fail. Northern Rock's ex-CEO, Adam Applegarth, caused a storm when he was allowed to leave with over £1m in bonuses and pension top-ups, having presided over the collapse of the company.
In the US, a similar situation at Bear Stearns saw its CEO receive no bonus for 2007. He won't go hungry, however, as he was paid more than $33m the previous year. Meanwhile, troubled mortgage institutions Fannie Mae (NYSE: FNA) and Freddie Mac (NYSE: FRE) accounted for ten of the top 100 highest paid executives in the United States, despite having to graciously accept a bail-out from the American taxpayers.
Management of finances at Bradford & Bingley (LSE: BB) were also less than satisfactory, with share buybacks being followed months later by a bungled rights issue, the company having denied that any additional cash would be required. Last year, its Financial Director was paid over £700k for his services; it will be interesting to see if this will be maintained.
Last week, a group of shareholders at heavily indebted Yell (LSE: YELL), producer of the Yellow Pages, voted against acceptance of the remuneration report at the company's AGM. They were objecting to the management receiving bonuses greater than their salaries, at a time when the share price had fallen more than 90%, but in the end the report was passed by a comfortable majority.
In contrast, it was refreshing to see British Airways (LSE: BAY) boss, Willie Walsh, voluntarily decline his bonus of £700k following the debacle at Terminal Five, in spite of delivering a good set of financial results.
Being a CEO is a risky job -- they tend to have a short shelf-life, and any failures are very visible. They deserve to be compensated for that risk, and when they perform well they should be rewarded. It should not be a one-way bet, however, and shareholders should not allow them to be paid for failure.
