My home insurance premium has been going up the last few years, and I decided to check and see how much. Pulling out the old bills, I was shocked to find that it had increased by about 6 per cent, 8 per cent and 10 per cent over the last three years. I called the company, Liberty Mutual, and demanded an explanation.

The very polite customer service person replied that the last few years had been difficult times when there were large payouts due to natural disasters. She reminded me that there were tornadoes that had struck down several houses in the area, and the flooding the previous year, and so on. When disasters like this strike, then every one's premium goes up, she patiently explained.

True. But what she did not include in her list of reasons was another disaster that struck the company. The CEO.

Liberty Mutual's head, Mr Ted Kelly, has been paid about $50 million (Rs 255 crore) a year for the last three years that he was CEO (before he relinquished that post, although he continues as the Chairman). And the reason for my angst is that Liberty Mutual is ‘mutually owned' by all the policy holders. So, any surplus profits are supposed to be returned to us as dividends (or premium reductions), or reinvested in the company. If Mr Kelly was not so greedy, I would not have had to pay the premium increases I did.

Mr Kelly's compensation puts him above those of many other corporations and the revelation comes at a time when there is a backlash against such corporate excesses. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required public limited companies to ask its shareholders to vote on a non-binding resolution to approve the compensation of the executive officers of the company.

Under this requirement, 55 per cent of the shareholders of Citigroup recently voted against the $15-million (Rs 76.5-crore) pay package of the CEO, Mr Vikram Pandit. Liberty Mutual, owned by policy holders and not shareholders, escaped this step.

Unjustified tax sops

Mr Kelly has kept those near and dear equally happy.

Investigators at the Boston Globe , the local newspaper, sought documents from the State's Division of Insurance and found that the nine highest earners in the company have all been receiving compensation that run into several millions, and some higher than the compensation of the CEOs of other insurance companies, even larger than Liberty Mutual.

Recently the company received $46.5 million (Rs 237 crore) in tax incentives from the State and city on grounds that it was building an office tower in Boston which would generate additional jobs.

Although the firm is headquartered in Boston, it has apparently been hinting that it would move some offices to a neighbouring state if it did not get these incentives.

With the CEO's compensation now a public issue, the public officials are left wondering how to justify these incentives which effectively subsidised the runaway compensation schemes at the company at a time when the State agencies are raising bus and subway rates to balance their budgets. It is not just Mr Kelly's compensation that has the community agog.

The paper reports that Liberty Mutual maintains a fleet of five aircraft and investigations show that a large number of flights by the aircraft were to locations where Mr Kelly owns vacation homes or to places with well-known golf clubs. More dirt is sure to come out in the weeks ahead.

Stock options escape route

Of course, this is not a tirade against the wealthy. Those who have come by their wealth due to their entrepreneurial skills, performance, or their excellence in sports or other fields deserve it. A CEO's compensation needs to have some relationship to the size of the company, and the challenges of running it.

The pay-for-performance argument has been pushing companies to shift compensation more towards stock options rather than cash so that in accordance with the agency theory, the CEO and top executives will work towards raising the share price over time, which benefits the shareholders.

But this has also given companies one more way to provide excessive compensation by structuring the pricing and vesting of the stock options liberally.

Mr Kelly's compensation is neither justified on the basis of industry practice nor his performance. The only other explanation can be that he and his friends managed to capture the governance of the company and run it for their benefit. There is some merit to that argument. He was the Chairman and CEO at the time of these excess payments.

The board of directors decides the compensation and unless the process of selection of the board members and transparency of key decisions is institutionalised, the general habit of CEOs packing the board with their cronies who are happy to put their thumb print on any proposal will continue.

A look at the directors of Liberty Mutual suggests that they may have been suffering from this disease.

Success is collective

The company, after more than a week of public criticism, came out with a statement that argued that what seems like excess pay is only the bunching of some compensation items towards the end of Mr Kelly's 13-year reign as CEO.

But they now say they have heard the public's concern and promise to reveal senior managers' compensation in their annual reports in the future.

Hopefully, these managers would realise that several thousand people in the organisation worked to produce the results for which the top is extracting what Marx would call ‘surplus value'.

(The author is professor of International Business and Strategic Management at Suffolk University, Boston, US. >blfeedback@thehindu.co.in )

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