McDonald's to pay former CEO $3M: Blame Bill Clinton
Recently ousted McDonald’s CEO Don Thompson will continue to be paid $3.3 million for consulting services, that’s nearly three times more than the salary of his replacement, Steve Easterbrook, who will earn just $1.1 million per year. Thompson retired as CEO after 25 years with McDonald’s this January amid accusations that he was hurting the fast-food business and was unable to implement quick change. Thompson made $9.5 million in 2013.
Meanwhile, the average hourly wage among McDonald’s workers with five to eight years of experience is $9.15 with 13% of all employees making the Federal minimum wage of $7.25.
Thompson was CEO of McDonald’s for less than three years and sales were down every quarter he was there. David Nelson, Chief Strategist at Belpointe Asset Management, believes that this $3 million consulting deal was likely the cost of breaking Thompson’s contract.
As for the current CEOs salary cut, Nelson traces it back to the Clinton administration. “Bill Clinton decided that CEO pay was too high and they went to the IRS and decided to make anything over $1 million nondeductible. That pushed everybody out of the salary camp and pushed them into stock-based compensation.” Nelson suspects Steve Easterbrook is actually making much more than $1 million.
In fact, according to data from the AFL-CIO, the gap between CEO pay and shop floor pay at Fortune 500 companies is around 300 to 1. Nelson believes that the Clinton-IRS regulation is responsible for driving total CEO pay up 1700% since 1994.
In an article for the Yahoo Contributor’s Network, Nelson writes:
Early in his presidency, Bill Clinton decided CEO’s were making too much money and concluded government should play a role in leveling the playing field. His solution was using IRS tax code 162 (m) which limits the deduction of CEO pay as an expense to $1 million. On its own that might have forced boards to reconsider high compensation as the lack of a write off would start to cut into profits and eventually share prices. However, the code permits expensing of “performance” based pay above the stated $1 million if certain goals are met.
Clinton’s law soon became an inside joke in boardrooms across America. Performance-based compensation much of which came in the form of stock options and restricted stock exploded in the 90’s during the run up into and bursting of the Internet bubble. The recession that followed along with the financial crisis weighed on compensation but the last 5 years has seen a return to trend. C suite pay is rising far faster than the rest of the workforce.
After 20 years, I think it’s safe to say the policy is a failure. Performance based pay became so attractive that there are countless examples of CEO’s willing to accept just $1 in salary. Stock based compensation in all its forms became the preferred currency. Today, CEO’s have no better friend than the IRS.
Of course, printing your own currency creates problems. Existing shareholders are diluted and even though you can expense the compensation it cuts into the bottom line.
Do you think McDonald's compensation plan for Don Thompson is fair? Let us know in the comments below.
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