Rules For CEO Pay: Fail by Your Own Standard, Change the Standard

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Gretchen Morgenson of The New York Times reports that the executive compensation committee of Wal-Mart has dropped same-store sales from its metric for assesing the performance of Wal-Mart CEO Michael Duke. Morgenson writes:

Why? The change was “intended to align our performance share goals more closely with our evolving business strategy, which emphasizes productive growth, leverage and returns,” Wal-Mart said.

The timing was certainly curious. The switch came amid a sustained decline in Wal-Mart’s same-store sales, which have been falling for nearly two years. The company’s total sales, however, rose 3.4 percent in the latest fiscal year.

Shifting the goal posts meant more money for Mr. Duke in the latest fiscal year than he would have received under the old arrangement. His compensation totaled $18.7 million, more than $16 million of which was performance-based.

Changing the rules of the game to make sure that CEO compensation keeps growing is why CEO pay has balloned relative to compensation in the rest of the economy.

This news also reminds me of a policy approved by the Pennsylvania-based homebuilder Toll Brothers in March 2008 — at a time when the recession was just three months old, but the toll of the collapsing housing market had not yet taken down the financial system. The company approved a bonus plan that moved away from awarding bonuses based on financial performance:

The chief executive, Robert I. Toll, did not receive a bonus for 2007 as much of the housing market went into a deep slump. But had the new bonus plan been in effect last year, the company said, he would have received $6.56 million.

Albert Einstein famously defined insanity as "doing the same thing over and over again and expecting different results." Corporate governance seems to fit that definition to a tee.

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