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Monday, November 06, 2006

America's Laziest Man

November 7, 2006
Op-Ed Columnist

Last year, Barry Diller took home a pay package worth $469 million, making him the highest-paid chief executive in America.

His shareholders didn’t do so well. Stock in the main company he runs, IAC/Interactive, declined 7.7 percent last year. For the three years ending in December 2005, the stock was up just 11 percent — compared with 49 percent for the S. & P. 500.

Just think! If you’re capable of running a company only a little worse than the average C.E.O., then Mr. Diller thinks you’re worth almost half a billion dollars!

So I’m delighted to announce that Mr. Diller is this year’s winner of my Michael Eisner Award, given annually to commemorate the former Disney chairman’s pathbreaking achievements in corporate rapacity. The winner of the Eisner award receives a shower curtain — this year it’s a lovely pink floral model costing $5 — in honor of the $6,000 one that Tyco’s shareholders purchased for their former C.E.O.

There’s nothing wrong, in principle, with a big pay package. Baseball players, movie stars and investment bankers often get outrageous pay, but after arms-length negotiations. That is capitalism at work, and nobody is getting ripped off.

In contrast, as John Kenneth Galbraith once noted: “The salary of the chief executive of the large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”

Consider Mr. Diller. As my Times colleague Geraldine Fabrikant noted in an article about his pay, he owns 2 percent of IAC but controls 56 percent of the voting stock. In effect, he chooses the board — and thus the members of the compensation committee who decide his pay.

There are different ways of valuing compensation. A research firm called the Corporate Library calculated Mr. Diller’s as $295 million from IAC (not counting another $174 million from Expedia, an IAC spinoff). Most of these sums were in options that had been granted much earlier but exercised last year.

Another way to look at it is to focus not on the value to Mr. Diller but on the cost to the company. By that method — counting newly issued options but not the exercise of older ones — IAC paid him $85 million last year, according to a research firm called Glass Lewis & Company.

Each research firm said that by the method it used, Mr. Diller was the highest-paid chief executive last year.

“This is a grab fest,” said Jonathan Weil, managing director of Glass Lewis. “I don’t see any justification for this company paying him that.”

So how does the company justify it? In its proxy statement, IAC said that its aim was partly to align Mr. Diller’s interest with those of the shareholders. Funny alignment, since it meant that a sum equivalent to 9.8 percent of the company’s profits last year vanished into his pocket. In contrast, in the best-governed companies the chief executive takes home an amount equivalent to 0.2 percent of earnings.

IAC also said that the package was necessary to “motivate Mr. Diller for the future.” Goodness, this man needs a lot of motivation! He required about $150,000 every hour just to get motivated — suggesting that he may be the laziest man in America.

Mr. Diller spent 20 minutes trying to drum sense into me, but I’m not sure it was worth $50,000 worth of his time.

“It’s by any standard a great deal of money,” he said of his compensation, but he also advised that “it’s lazy and dumb” to focus on income from options that were issued years ago. His icy tone almost froze my telephone line.

As for the newly granted options, he noted that to be exercised the stock price must rise and he must stay with the company for five years. He initially insisted that they thus had no value, although he backed off when I cited Black-Scholes option pricing models that value his new options in the tens of millions of dollars.

Am I being mean to Mr. Diller? Perhaps. He is a giant in corporate America who has sometimes shown tremendous vision on behalf of shareholders (the same was true, early on, of Mr. Eisner).

But we have a broad problem in this country of C.E.O.’s reaching into the till and overpaying themselves at shareholders’ expense. The average C.E.O. earns 369 times as much as the average worker, compared with 36 times as much back in 1976.

Better governance and more transparency may encourage restraint, and so may a dash of ridicule. Let’s hope that Mr. Diller will shower behind his pink vinyl shower curtain and learn the concept of shame.

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