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Critical Thinking

CEOs Should Be Paid to Perform – Not to Fail

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SandRidge Energy just fired its founding CEO, Tom Ward, following a proxy battle with activist investor, TPG-Axon Capital. The hedge fund had a problem with the combination of Ward’s exorbitant pay and the company’s terrible stock performance. It called for Ward’s head and got it. But the founder still walks away with about a $90 million exit package.

Does he deserve it? Let’s see. The walk-away money’s a pretty rich deal, but not out of the ballpark, at least not by modern standards. And Ward’s total compensation since founding the company in 2006 has been about $116 million. While that does make him a relatively high-paid oil chief, again, it’s not out of the realm of possibilities.

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There are, however, three very important considerations to keep in mind:

We’re not talking about an oil giant like ExxonMobil or even Apache, here. We’re not even talking about an S&P 500 component. SandRidge is about a $2 billion company, a tiny blip on the radar screen of the energy sector. To put that in perspective, Ward’s $90 million exit deal would wipe out all the company’s profits for 2012.

After a six-month post IPO run-up in 2008, the company’s stock fell off a cliff. So did others – it was a bad recession – but unlike competitors and the broader market, SandRidge never recovered. Its share price is down over 90% from its peak five years ago.

Ward and the board were also taken to task by activist investors for allowing WCT Resources, another Oklahoma-based oil company run by Ward’s son, Trent, the rights to drill near SandRidge sites. Two board investigations found no conflicts of interest, but that could very well be because the board was investigating Ward, not itself.

When you take all that into account, I’d say Ward deserved an exit package of, well, zero. Granted, the terms were all spelled out in his employment contract. But that just highlights how ludicrous those negotiations have become these days. In far too many cases, CEOs are paid far more for failing miserably than if they’d just done their jobs.

One of the more egregious examples of that is the curious case of Hollywood super-agent Michael Ovitz. For some reason nobody was ever able to figure out, Michael Eisner, Disney’s CEO at the time, fought tooth and nail to make Ovitz president of the company. Turns out that Ovitz didn’t have it in him and Eisner had to fire him after just 14 months.

For that, Ovitz got $140 million. Of course, there were shareholder lawsuits but, somehow, neither Eisner nor Disney’s board were found culpable, even though they somehow managed to negotiate about the dumbest termination clause in the history of employment contracts.

The sad thing about both the Ovitz and Ward stories is that they make everyone sick to their stomachs anytime executive compensation comes up in conversation. Granted, compensation for big company chief executives is out of control, but that’s not usually the case for the tens of thousands of CEOs of small-to-mid-sized companies.

The same is true of exit packages. Little known fact: Employment and termination agreements aren’t even the norm in the high-tech industry. Last time I checked – granted, it’s been a while – the likes of Cisco, Google, Intel, and Microsoft had no such agreements with their executive officers. None.

Not only that, but you can’t paint all payouts to exiting CEOs with the same brush, as we all too often do. It’s one thing to walk away with the equivalent of a winning lottery ticket for running a company into the ground. It’s another thing entirely to spend your life turning a small company into an industry giant, creating jobs and shareholder wealth in the process.

For example, former ExxonMobil chief Lee Raymond walked away with a $400 million payout, but that was the sum of his pension, long-term compensation, and stock accrued over 40 years, including 12 running the oil giant. Employees and shareholders had nothing to complain about there.

To me, the bottom line is this. If you’re going to pay CEOs big bucks, then pay them to perform, not to fail. No board of directors should be signing employment contracts that reward executives for failing to do their jobs or overcompensating them for just showing up for work. That’s not how it should work.

According to one of Ward’s attorneys, “Two separate board investigations have now confirmed that Tom Ward’s actions were proper. No one has worked harder for or been more loyal to SandRidge Energy than Mr. Ward.”

To me, that says it all. No CEO should walk away with a $90 million check after being paid $116 million to run a company – badly – for six years. Maybe his actions were proper. Maybe he was loyal and worked hard. For that, he had one too many zeros in his compensation – and zero is all he should have gotten to walk out the door.

What do you think?

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