I just recently finished reading the great book Barbarians at the Gate,
which detailed the dramatic events and the colourful figures involved
in the attempt to secure a leveraged buy-out of RJR Nabisco in the
1980s. While the LBO was successful and the company was taken out
of the public markets, I wanted to see what the current status of the
company was today. In the years subsequent to the LBO, Reynolds
Tobacco and Nabisco were spun off in several directions. Today, the
heir to Nabisco is Mondelez International, Inc and has since re-
entered the public market.
According to Executive Pay watch, the CEO for Mondelez
International is Dirk de Put, who earned a total compensation in 2021
of $16,128,320, through a salary of $1,487,670, stock awards of
$9,120,315, option awards of $2,320,357, non-equity incentive plan
compensation of $2,525,250 and other compensation amounting to
$674,728.
Research into the average salary of Mondelez International
Employees lead me to information provided by payscale.com which
stated average base salary for employees was $87,000 per year. If we
were to take CEO de Put’s total compensation into account, the
executive earned 185 times more than the average employee, but I
don’t agree with that approach. Incorporating the value of stock and
option awards into the equation does not provide an apples-to-apples
comparison, as the employee data set does not include information
on the stock holdings of employees, neither does in include incentive
or bonus pay. It simply provides the advertised salaries for the
positions within the company. For that reason, I would feel it more
appropriate to assess these figures on salary alone. With a salary of
$1,487,670 CEO de Put would be earning 17 times the average salary
of employees.
At this rate, I would agree that the salary of Chief Executive of
Mondelez is appropriate. While the day-to-day activities of
executives rarely involve the actual production of products sold to
market, there is a significant weight attached to the expectations of
leadership for the company and the legal, financial, and political
challenges that come with every decision. CEOs, while receiving
substantial benefits, have the weight of responsibility hefted upon
them to respond to the concerns of regulators, legal authorities and
shareholders all of whom hold means to make life very difficult. If I
were to consider the utility of money provided through this position
versus the cost associated with the mental and emotional strain of
remaining constantly at risk of legal issues, I would certainly discount
value of the position significantly – in other words, I would pay a
significant amount of foregone revenue to not have to deal with that
level of stress.
As we see in, he Mondelez example, most of the CEO de Put’s
compensation comes in the form of stock and stock options. This
places a considerable incentive for the CEO to ensure increased
returns on shares of the company for shareholders as he is one as
well. However, once again, Barbarians at the Gate presents a useful
example of the costs associated with this practice. One primary
benefit that was to be obtained by then CEO F. Ross Johnson was the
return he would obtain through an LBO of increased price. From the
bidding war that occurred in the events of the tale, the offer price for
the company escalated from the mid-$70 range to more than $110
per share. This was done through widespread use of junk bond and
financial engineering, aiming to acquire the company by some and
auction its parts for increased returns in order to pay back the
creditors whose money made the $25 billion buyout possible. The
end point remains a pressing question, was the company improved
and were the shareholders beneficiaries of these activities. It begs the
question as to whether or not the opportunity to see immense gains
in the significant holdings of shares by CEO presents a heightened
risk that they would pursue costly, or detrimental means to ensure an
increase in share price. That is definitely a cost that is worth
accounting for.
I think one area of auditing that is worth assessing in the context of
executive compensation is the role of the company’s internal
auditors. The Institute of Internal Auditors recognizes that Executive
compensation and benefits programs are reliant upon effective
governance on behalf of the corporate board and management and
believe that performing audits on the structure and operation of
benefit programs is a “legitimate and appropriate” role of an internal
auditing process. The organization has put forward a guide for
internal auditors to ensure risks associated with the employment
market, regulatory and legal compliance, financial reporting,
reputation, and external business risks are incorporated into the
design of executive compensation – especially as compensation and
benefit programs are subject to risk of fraud. I believe these are
legitimate risks to establish a plan for a company’s internal auditing
team to ensure benefit packages are in accordance with the legal,
regulatory, and business needs of a public corporation.
References
Burrough, B., & Helyar, J. (2005).
Barbarians at the Gate
.
HarperBusiness.
Morely, L. Czarnecki, N. Practice Guide: Auditing Executive
Compensation and Benefits. The Institute of Internal Auditors.
Retrieved from
https://www.theiia.org/en/products/bookstore/practice-guide-
auditing-executive-compensation-and-benefits/
