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Management Side
Boards of Directors and Capital Projects
Boards of Directors go to great lengths to determine the appropriate pay range for senior executives. A number of years ago, I went to a symposium at the annual convention of the National Association of Corporate Directors that explained this crazy process. The executive compensation committee typically hires some renowned consultant to survey similar companies and determine what the appropriate compensation package is for the CEO and other senior staff members. Then, of course, the board wants to pay its CEO, et al., in the upper quartile (as they somehow think money equals quality). Hence the merry-go-round of increases each year as boards in similar industries attempt to keep their CEOs, hence all CEOs, in the upper quartile--a mathematical impossibility.

Would that they used such care when considering and approving capital projects! For capital projects, boards tend to accept the numbers given to them by internal staffs. These numbers are often low, in order to show a good ROI and meet other spending and funding objectives of the company. Often, these capital budgets are unrealistic and plumped with optimistic "what ifs" that will never occur, in order to meet the thresholds required. Yet, capital projects have a much longer lasting effect on companies than do some CEOs. On top of that, the capital spending bets made by many boards over the last few decades have been completely wrong--look at the bankruptcies, foreclosures and just plain abandonments of assets for evidence of the lousy job boards are doing in this area.

Perhaps it is time to treat capital approvals with at least the same care and consideration given to the CEO's annual compensation package improvements.

Jim Thompson is Executive Editor of Paperitalo Publications. He can be reached by email at jthompson@taii.com.
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