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Why Cutting A CEO's Pay Can Be Very Difficult


Plenty of people complain about the huge compensation collected by corporate CEOs. But as this story from our Planet Money team shows, actually cutting a CEO's pay turns out to be difficult. Here are David Kestenbaum and Jacob Goldstein.

DAVID KESTENBAUM, BYLINE: It takes an unusual person to wage a war against the CEO and his pay. A Tim Stabosz was definitely an outsider.

JACOB GOLDSTEIN, BYLINE: He lives in a small town, LaPorte, Indiana. He has a small house. In the dining room, there's a broken Dungeons and Dragons pinball machine.

TIM STABOSZ: Here it is, yeah. It was just a disaster.

KESTENBAUM: Tim has been investing in the stock market for decades. He's done well. And back in the mid-'90s, he bought stock in this small company on Long Island called P and F Industries. It makes pneumatic tools. Over the years, something began to gnaw at him - the salary of the CEO, Richard Horowitz.

STABOSZ: Roughly one and a half million dollars a year total compensation.

KESTENBAUM: Is that a lot?

STABOSZ: Well, one and a half million is outrageous and outlandish.

GOLDSTEIN: Stabosz couldn't find any similar companies where the CEO was paid even half of what Horowitz made.

KESTENBAUM: Now, if you just own a few shares of a company's stock and you think the CEO is overpaid, there isn't much you can do. But if you own more, that's different. And by the fall of 2009, Tim Stabosz owned 180,000 shares.

STABOSZ: I came to own 5 percent.

GOLDSTEIN: Five percent of the whole company?

STABOSZ: Five percent of the entire company.

KESTENBAUM: His stake was worth more than a half a million dollars.

GOLDSTEIN: Sometimes when people complain about CEO pay, they talk about it as if the money is coming out of the pockets of ordinary workers. That is not how Stabosz sees it. Every dollar the CEO gets is a dollar less profit. A dollar less for Stabosz and all the other stockholders. That's why Stabosz wanted to cut the CEO's pay.

KESTENBAUM: Richard Horowitz, the CEO, declined to be interviewed. But there are plenty of recordings of him from P and F's quarterly earnings calls. In this one, Tim Stabosz wants to talk about Horowitz's pay. Horowitz wants to talk about the company's results in the second quarter, Q2.


RICHARD HOROWITZ: Please, please, Tim, please let's keep the comments to the Q2, count the numbers, thank you.

STABOSZ: Well, that's fine, but executive salaries are relevant to the future profitability and what not.

HOROWITZ: I can't comment any further, Tim.

STABOSZ: Well, it would have been helpful if you would have simply said we're not going to talk about executive compensation period because that's what you're essentially saying, right?

HOROWITZ: Any other questions about Q2, Tim?

STABOSZ: I'll get back in queue, I'm frustrated right now, Richard.

KESTENBAUM: There are a lot of calls this and letters. Tim Stabosz starts writing these letters to the company with words in all caps.

GOLDSTEIN: A CEO's salary is set by a company's board of directors. So Tim nominated himself for the board. Another investor who also wanted the CEO's pay cut suggested several outside candidates.

KESTENBAUM: One of those outside candidates actually made it onto the board. And then in 2011, after years of fighting, the board did cut Richard Horowitz's base pay by a lot - from $975,000 to $650,000. A cut of over $300,000.

STABOSZ: Well, it felt fantastic. It felt great. It felt like I had served to affect this change, that I was an agent of change.

GOLDSTEIN: That feeling didn't last. The new contract also made it easier for Horowitz to get a bigger bonus. And in 2012, he actually ended up making more money than he had the previous year. Then earlier this year, Richard Horowitz got a raise. The board boosted his base pay by $50,000.

KESTENBAUM: The company only let us talk to one person on its side of things, the new board member. The one nominated by the investor who wanted to cut the CEO's pay. The board member's name is Howard Brownstein. And Brownstein told us Horowitz's pay is not too high.

HOWARD BROWNSTEIN: You know, there's no one number that's the right number, there's probably a range. And I believe it's within the range of reasonableness.

KESTENBAUM: We asked Brownstein about a compensation study that the company had done, comparing Horowitz's salary to that of other CEOs. Tim Stabosz had written a letter demanding that the company release it. Stabosz wrote it I demand in all caps.

BROWNSTEIN: Mr. Stabosz obviously has been able to find the caps lock key on his typewriter. Look, he may say he demands it, but the fact is he doesn't have a right to it. What he really meant when I he said I demand it is I really, really want it. I get it. It's OK. You can't have it. Next.

KESTENBAUM: Since P and F wouldn't release the study, we asked a firm called Equilar that does this sort of thing to take a look. It found that depending on how you crunch the numbers, Richard Horowitz is either one of the highest-paid or the highest paid for what he does.

GOLDSTEIN: As for Tim Stabosz, he is not complaining about Horowitz's pay anymore. After we talked to him, he had a momentary cash crunch - had to sell all his shares in P and F. The company bought them from him and as part of the deal, Tim and the company promised not to say anything bad about each other for three years. I'm Jacob Goldstein.

KESTENBAUM: And I'm David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.

Jacob Goldstein and David Kestenbaum