Rewarding failure

Last week, Charles O ("Chuck") Prince retired as the chief executive officer of Citigroup, taking with him accumulated benefits valued at around $29.5 million. This was poor pickings when compared with the $161 million that Stan O'Neal (Rs 640 crore) took home as benefits when he retired from Merrill Lynch last month. Humungous CEO pay packets and associated benefits have long ceased to be a cause for wonder. But here's the rub. Both Mr Prince and Mr O'Neal, who headed two of the world's most powerful banks, have been allowed to take early retirement by their boards following huge over-exposure to the US housing mortgage crisis. Mr Prince and Mr O'Neal, both in their fifties, were well below 75 years, the official retirement age. Both have seen their companies write down billions of dollars "" with more expected as the crisis works its way through the system. Both companies also saw their share prices plummet as a result, wiping out billions in shareholder value. Now, piquantly, both appear to have been generously rewarded for rank dereliction of CEO duty. An Australian paper described Mr Prince's departure as a "Prince-ly sum for a losing punter". Indeed, Mr Prince will continue to receive an office, administrative assistance, a car and a driver from Citigroup for five years or until he finds alternative employment. Judging from the vortex of acerbic comment, the Prince and O'Neal experiences underscore an emerging worst practice in global business "" the growing disconnect between pay and performance.

It has been argued that in displaying such open-handedness towards Messrs Prince and O'Neal, their respective corporate boards were merely adhering to contractual obligations. After all, in a globalised business world fraught with escalating risk, most CEOs of transnational corporations are careful to include golden parachute clauses. Shareholders, however, may ask whether following the letter of a contract should absolve a board and the CEO of accountability "" and surely this should be as much a concern as any other corporate governance issue. Had the Citi and Merrill boards asked Messrs Prince and O'Neal to resign, it is unlikely that either would have taken home such generous benefits. Also, it is now clear that both boards had ample discretion to decide their CEOs' retirement package and probably erred on the side of charity. In a business world in which managerial structures are increasingly flattening, such issues become critical to corporate performance. It doesn't achieve much to argue for more egalitarianism in managerial pay packages. But it must surely be worth asking whether the growing differential between the CEO's pay and that of his or her management colleagues is a healthy trend, especially when the latter faces stiff performance targets.

This issue is especially pertinent in the emerging economies where business and political patronage often have a direct correlation with CEO wealth. This has long been an accepted fact in India Inc. But nowhere has it been clearer than in Mexico, a middle-income country that boasts one of the world's richest people. Carlos Slim Helu ranks among the world's wealthiest and has an income that the poorest Mexican couldn't earn in an aeon "" and his wealth is built entirely on a government-mandated telecom monopoly. So, Mr Slim's wealth is not only built on rent from Mexican consumers, it has little connection with his performance as a corporate chief. Is this desirable? Gordon Gecko famously said in the movie Wall Street: "Greed is good." Perhaps greed works as a performance driver. The problems begin when feeding greed becomes an end in itself.