Honeywell's "All-The-Other-Kids-Have-One" Compensation Policy

In our recent blog posting Compensation Consultants Need Not Apply at Berkshire Hathaway we wrote how Mr. Buffet strongly criticized executive compensation, especially the practice of setting executive pay based on how CEOs in similar industries earn (what he refers to as the "All-the-other-kids-have-one" approach). So, it was with great amusement I read the story today about how the CEO of Honeywell International Inc. received compensation valued at $20.3 million last year, based on the advice of you guessed it - compensation consultants. In the story, Honeywell said its compensation committee

"worked with Mercer Human Resource Consulting" in determining compensation since last year. The committee compared its executives' pay with that of 14 companies that are of similar size, or are competitors for products or management talent, the filing said.

Hmm. I wonder if performance ever entered into the equation? These types of salaries would be more palatable (in the opinion of this blogger) if the CEO was hitting the ball out of the park - year-after-year. But Honeywell isn't.

The chart on this page shows how Honeywell's shareholders did over the last five years compared to the total stock market index (VTSMX) and the S&P 500. Honeywell underperformed both. The week of March 18th, 2002 Honeywell closed at 38.70 and today, it closed at around 47 - a 21% increase over a five-year period - nothing to brag about. If you put your money in the total stock market index, you would have done much better (VTSMX was at 25.92 the week of March 18, 2002 and today closed at about 34 - a 31% increase.).

In a related article today in the Wall Street Journal (section B, Page 1), George Anders article titled After Rejecting Pay Some CEOs Find Less Can Be More profiles several Fortune 500 CEOs who reduced their salary to $1 per year while tying their entire compensation to the company's stock. Risky? Absolutely. Admirable? Quite.

Posted by Mark Willaman

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