The roughly $50 million-a-year paycheck earned by Liberty Mutual’s Edmund “Ted” Kelly over the past four years is not only out of whack compared to similar-sized companies, but out of step with reality.
Kelly’s yearly pay was more than 100 times that of President Obama, and more than all US presidents have earned throughout American history. It’s more than that of the entire 100-member US Senate. Liberty Mutual recently negotiated $46.5 million in tax breaks from the Commonwealth and the City of Boston in exchange for agreeing to create 600 jobs in the city; but even if all 600 earn $80,000 per year, they might not equal what Kelly himself took home in 2011.
The paycheck given to Kelly, who headed Liberty Mutual for 13 years before his retirement last June, is especially questionable because it appears to take advantage of the unique corporate structure of his company, a “mutual” insurer that is owned collectively by its policyholders. In publicly traded companies, stockholders, who usually include large funds and investors, can serve as a check on spiraling executive pay. But people who take out home and auto insurance policies don’t conceive of them as shares in a company; at Liberty Mutual’s annual meeting, only about 10 policyholders bothered to attend, reported the Globe’s Todd Wallack.
In that ownership vacuum, Liberty Mutual’s board members and executives are free to chart their own course. The only check is insurance regulation; if Kelly’s pay were found to be wasteful or unnecessary, the state could intervene on behalf of the policyholders. But Joe Murphy, the state insurance commissioner, said he was reluctant. “It’s not our role to tell companies how to run their business,” he told the Globe.
But in a case as exceptional as this one, Murphy should intervene. He doesn’t have to tell Liberty Mutual’s officers how to run the company, but he has a clear responsibility to stand up for Massachusetts policyholders if there’s evidence of a salary so seriously at odds with the industry norm. If Liberty Mutual executives are earning excessive pay, the policyholders, as rightful owners, are being cheated.
Murphy shouldn’t attempt to resolve the national issue of rising executive pay, nor should he take it upon himself to determine what, specifically, Kelly should earn. He should simply make sure that Kelly’s salary is roughly consistent with what he might expect on the open market. And there’s reason to be doubtful: MassMutual, the state’s other Fortune 500 insurer, gave its CEO roughly $7 million in 2011, even after a major pay hike. MassMutual is smaller than Liberty Mutual, but MetLife, which is larger, paid its CEO less than a third of Kelly’s haul between 2008 and 2010, the most recent years available. Meanwhile, Kelly’s successor as CEO of Liberty Mutual, David H. Long, earned $5.3 million last year. Long, in other words, is doing the same job for almost 90 percent less.
Meanwhile, Liberty Mutual’s own actions surrounding Kelly’s paycheck suggest a lack of oversight and transparency. Kelly retired as CEO less than halfway through 2011, while remaining as chairman of the board, but still took home as much as he did the year before; the firm declined to reveal that information on a regulatory filing, on the grounds that he had retired. Liberty Mutual has also refused to say how much Kelly is earning this year. For its own credibility, it should. And Murphy should use his regulatory authority to find out how salaries at Liberty Mutual are determined, and whether the company’s board — whose own members reportedly collect stipends of about $200,000 — is exercising sufficient oversight.
Liberty Mutual is one of the signature companies in Massachusetts, and in many ways has been a good corporate citizen. Its commitment to the state and city are admirable. But every institution can benefit from checks and balances. In Liberty Mutual’s unusual structure, the insurance commissioner is an important check. The company — and its policyholder-owners — need his input right now.