Print this

Email this

Submit a Question

The past week's outcry over Jack Welch's retirement has a lesson for everyone:

Get along with your spouse.

Otherwise, there's nothing to be learned. Yet an enormous bull's eye has been on Welch's forehead ever since a reporter for The New York Times pored through divorce papers filed by the presumably soon-to-be-ex-wife of General Electric's former CEO. The man once called "Manager of the Year" by FORTUNE magazine has become a symbol of corporate greed. Even the Wall Street Journal -- perhaps the most anti-populist major publication in America -- chided GE's board for approving Welch's post-CEO compensation, which was detailed in divorce documents.

Welch's retirement package is undeniably rich and, strictly speaking, unnecessary. As someone reportedly worth several hundred million, Welch can afford the cost of his own Manhattan apartment, not to mention its cleaning and toiletries. He has the ability to pay for his own flights, rather than using a GE-furnished jet. And it wouldn't hurt a company loyalist such as Welch to give GE executives free advice, rather than collecting a retainer as a consultant.

But many things aren't necessary, yet few people scream about the cost. It's not necessary to pay U.S. presidents more than a nominal salary -- after all, they already get free travel, room and board, and an expense account of $50,000 a year, and besides, no one runs for president for the paycheck. Yet complaints were relatively muted when the president's annual salary was doubled to $400,000 as of last year. Considering the difficulty and importance of his job, no reasonable person would be bothered by George W. Bush's pay.

Welch makes a lot more, but he also made a lot for shareholders by building GE into one of the greatest wealth creation engines of all time. During Welch's CEO tenure from April 1981 to September of last year, General Electric's market value multiplied more than 27 times, to $370 billion from $13 billion.

Critics argue that GE's stock price is more reflective of investors' faith in Welch himself, rather than the company's actual strength. "GE's stock has fallen by more than a quarter since his retirement, leading many to ask how much of the company's success was real and how much was just the 'Welch effect,' " Harvard professor Rakesh Khurana wrote this week in The New York Times.

Khurana's point is debatable. You could just as easily argue that the decline in GE's stock price over the past year has nothing to do with Welch and everything to do with the overall bear market.

At any rate, there's no denying GE's profit performance. From 1989 -- the first year for which GE results are available in SEC filings online -- through 2001, General Electric's net earnings totaled $93 billion, equal to the income of IBM, McDonald's and Wal-Mart combined over the same period. GE's cash rose to $9 billion last year from $2 billion in 1991, even as GE paid a total of $37.8 billion directly to shareholders in the form of dividends, which increased each year, once you account for stock splits.

Compare Welch's pay to that of fund managers. It's a stretch, but not a huge one considering the sprawling, diversified nature of the General Electric conglomerate. As with a mutual fund, buying a share of GE means buying into several different businesses.

Depending on which study you care to cite, the average management fee for active funds lies somewhere between 0.5 percent and 1 percent of total assets. Applying that range to the CEO pay scale of General Electric in 2001 would have padded Welch's bank account by at least $274 million -- a figure that would have sent shareholders into spasms. Yet few people mind paying those kinds of ratios to mutual fund managers, which makes the bluster about the much smaller pay of Welch -- whose strategy channeled more dollars into the hands of his shareholders than any mutual fund ever will -- all the more inexplicable.

And Welch's compensation is less than that of some star CEOs, not to mention celebrities in other fields.

Warren Buffett flies around in a corporate jet paid for by Berkshire Hathaway, yet the Sage of Omaha is venerated rather than vilified. People laugh when Buffett refers to his plane as corporate excess; they know Buffett is right, but they'll cut him slack and will continue to do so until he dies, even though Berkshire's book value has barely increased in three years.

Steve Jobs a few years ago found a corporate jet -- given to him outright, mind you, not simply made available for his use -- in his compensation package from Apple Computer, a company that has never been close to GE in generating profits. Don't remember seeing any editorials from the Journal then.

Chris Webber, assuming he stays out of jail, will make a total of $120 million as power forward for the Sacramento Kings,though he might be the NBA's softest marquee player. Charles Schulz made hundreds of millions drawing a comic strip (albeit a great one).

Where was the outrage for them?

There was little or none, because they produced what people wanted, whether it was capital growth, computers, basketball rebounds, or cartoon dogs flying away from the Red Baron. They earned their money.

So has Welch. He didn't break any laws. He didn't steal money from shareholders. The jet, the New York City digs, the access to corporate boxes at sports venues -- take that all away from Welch and it will make literally zero difference in GE's earnings per share. And the retirement package now drawing howls of disbelief wasn't even a secret -- it's been in every GE proxy statement since 1996.

How do you think Welch's wife backed up her divorce claims?

-- Sergio G. Non is the online editor of Wall $treet Week with FORTUNE.