Tuesday, April 18, 2006

Exxon-Mobil's PR Problem

Lots of media attention has been focused on Exxon-Mobil’s former chairman, Lee Raymond, and his compensation/retirement package totaling nearly $400 million. Of this total, nearly $100 million is a lump sum payment for pension benefits. Instead of taking an annuity, he received it all in one fell swoop. (This would be like taking out your entire 401(k) balance at once – which might cause an outrage over your compensation, too.) Over his 43 years with the company, this amounts to over $2 million per year – a substantial reward. The rest appears to be income from stock options and other incentive compensation plans, which have benefited from the run-up in Exxon-Mobil stock.

I will be the first to agree that this sounds like a lot of money for a corporate manager. If I were a shareholder of Exxon-Mobil, I would have my doubts about the compensation committee. However, it would be important to evaluate the deal at the time it was made, not in hindsight. After all, if stock performance increased, then he benefits, but it could go the other way.

In a commodity-based industry like oil, where price volatility can be dramatic and unrelated to the management performance, one should pause before granting largess to corporate managers in the form of “incentive” compensation tied to stock performance in relation to broader benchmarks. If oil gets pricey, the company sitting on oil reserves will make money. But is this a consequence of good operating management, or just dumb luck? Compensation agreements should take a more nuanced approach to measuring performance of management. However, that is strictly a matter of corporate governance, and the shareholders of Exxon-Mobil are the constituents to be concerned here. After all, the board is spending their money. Is it worth it? I have my doubts.

Unfortunately, major news outlets are approaching this not from the perspective of the shareholders, but instead from consumers. Most of them are beginning their stories like this, on the ABC News website: “Soaring gas prices are squeezing most Americans at the pump, but at least one man isn’t complaining.” Later, the article quotes a member of the Institute for Policy Studies, stating: “Clearly much of his high-level pay is due to the high price of gas.”

The story seems to suggest that he is benefiting from consumer pain, and that this is really unfair. To paraphrase: “Consumers are suffering, when “the man” is getting rich, and that, dude, this is, like really wrong.”

Whoa, Nellie! (Where is Keith Jackson when we need him? He should be reigning in the news guys, not just calling the sports on ABC.) Let’s back up a minute and go to the blackboard for a moment. Don’t be fooled into thinking this is a consumer issue. Companies make money taking risks to deliver products and services we want. Their profit motive gives us the products we need.

Exxon-Mobil is not an altruistic, people-loving enterprise. I’m sure they are fine people who love their neighbors as much as the next guy, but mostly they want profits from the good they have to sell. Fortunately for them, their product happens to be in high demand globally. That means that prices rise, and they make profits. If the company decides to spend a chunk of those profits on CEO compensation, that is their choice. It will not matter to consumers whether the profit is used to pay employees, or to pay investors (unless, of course, the consumer is also in one of these categories). The capital markets may punish them for choosing wrongly, but that is a matter for the shareholders, not consumers. The high cost of gasoline is not a reason to worry about his compensation.

We could actually make claims about prices in other areas affecting consumers, but I don’t see them being made. For example, last year concert tours generated over $3 billion in revenue in the U.S. – up sharply from 2004. Consumers are now accustomed to paying hundreds of dollars for concert seats. (This is more mystifying to me than high gas prices, but I confess the prospect of watching and listening to aging rockers is not high on my consumption list.).

In this concert market, high compensation for the artists has a lot to do with these rising ticket prices. Are these artists making money on the backs of their fans? And where is the outrage? In short, there is none, because people pay that much willingly. Lower prices would mean more consumer surplus, which might ultimately be captured by ticket scalpers instead of the artists and their promoters.

The hard truth here: markets work. Political instability in Nigeria and Iran, coupled with sizzling world demand translates into higher prices. (China’s economy grew at 10% of GDP – and check out yesterday’s WSJ for reports on automobile demand in developing countries – it is huge!). Similarly, higher consumer demand means that concert tickets are more costly than they once were. We have choices, and we should make them carefully without giving in to demagoguery about blaming “the man” or someone else.

Having said all that, though, I will bet that Exxon-Mobil wishes it was not in the spotlight for this behavior. Sunlight is a good disinfectant – and some people may not buy its products on account of this behavior. This public response is important and potentially powerful. You may choose not to buy products from companies who behave badly, and you don’t have to trace your decisions to sound reason if you want to.

It is a great country. Thanks for reading.


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