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June 6, 2007
Corporate CEOs Continue In Crisis Over Ballooning CEO Compensation
CARTOON: CEO Pay - Humongous!
"Rising income inequality is political dynamite and damages the reputation of American business, already scarred by recent corporate scandals."
According to a study published by the National Bureau of Economic Research.
Ask any thoughtful corporate board member what they are most concerned about these days, and it is not Sarbanes-Oxley. It is CEO pay. Directors worry because shareholders continue to express outrage, and the media attention to the issue will not go away.
According to the Harvard Business School Alumni Bulletin and Jay Lorsch, the Louis Kirstein Professor of Human Relations at Harvard Business School, directors are right to be concerned.
The long-term trend has been for CEO pay to rise along with the pay for other senior executives, and it is now twice as much as that of CEOs in major European countries, according to Towers Perrin, a global consultancy. A study published by the National Bureau of Economic Research indicates that the increase in pay of senior executives and superstars in other fields has been a major source of the rising inequality of wages in the United States. Rising income inequality is political dynamite and damages the reputation of American business, already scarred by recent corporate scandals.
Criticisms of CEO pay have two related themes: It is too high, and it not closely related to company performance.
These problems persist for complex reasons even as directors worry about them. The most significant reason is that board compensation committees face pressures to keep raising CEO pay. One pressure is the fear of losing an adequately performing CEO. To make sure this does not happen, compensation committees rely on surveys by compensation consultants about CEO pay in similar companies but without regard to company performance. These surveys report compensation by quartiles, and no compensation committee wants to admit that its CEO is below the median. In fact, most want to place their CEO in the upper quartile. As a result, CEOs are like the children of Lake Wobegon—all are above average.
CHART: CEO Pay Has Been Ballooning For Decades
Another upward pressure occurs when boards are trying to attract a new CEO from outside the company, and they make deals that guarantee the executive will come aboard. This means not only high pay, including incentives for performance, but also guaranteed "good-bye" payments if things do not work out. These are one of the biggest sources of concern.
Rising income inequality is political dynamite and damages the reputation of American business. The only existing pressure to keep CEO pay "reasonable" other than the directors' consciences is a concern about shareholder reaction to excess compensation, but even well-meaning directors find it difficult to focus on shareholders. Shareholders are a changing and abstract group to the directors, while the CEO who has to be attracted and motivated is real and has an office right down the hall from the boardroom. Not surprisingly then, the upward pressure wins out.
If there were a silver bullet to relieve these pressures, they would not be so persistent. There are, however, a few steps compensation committees can take.
CEOs are like the children of Lake Wobegon—all are above average.
First, they should recognize that consultants' surveys are flawed and are a huge source of the problem. In this regard, directors should at a minimum insist on surveys that reflect company performance.
Second, as former DuPont CEO Ed Woolard has suggested, it is helpful to gauge CEO pay in relation to what the next echelon of management is being paid, thus placing the focus on internal equity.
Finally, compensation committees should focus more on what the shareholders will accept. As CEO pay rises, it becomes, along with other executive compensation, a larger proportion of the wealth that otherwise would be available for shareholders. And ignoring shareholder concerns will continue to exacerbate the problem.
The SEC's new attention to greater disclosure, while producing more information for shareholders, is unlikely to resolve these problems. In fact, clearer data may give CEOs a basis to insist on higher pay, putting even greater pressure on compensation committees.
CARTOON: You're Fired...But Here's More Cash!
A few comments from the Reputation Doctor regarding the CEO compensation crisis:
It is impossible for any CEO to be viewed as a man or woman of integrity and credibility when some CEOs receive increasingly "humongous" CEO compensation packages as their corporations perform poorly and they continue to lie about corporate performance to shareholders, key stakeholders and the media.
Sadly, many corporations have CEOs and other C-suite executives lying to key shareholders, stakeholders and the media about corporate performance. Ironically, it is the job of the chief communications officer to properly counsel the CEO regarding these issues. These discussions are never easy. I have counseled several top chief communications officers, their CEOs and their board of directors through these storms over the years. Avoiding the issue never works. A CEO surrounded by "yes people" is also not a solution to the crisis. In fact, these "yes people" are part of the origin of the problem itself. A true counselor must overcome ones own fear to calmly, honestly, yet firmly analyze the issues for the CEO to see not only his or her options on the issues, but also clearly see the potential corporate downfalls of making the wrong decision, (especially lies and spin) and the corporate success of making the right decision. However, the right decision will usually involve some pain in walking through the fire of past mistakes and wrongdoing, but the goal is to get to the other side where truth, integrity, accountability, transparency, consistency and humility live and breathe to build a long-term, excellent reputation. The light at the end of a dark tunnel allows a personal and organizational reputation to thrive with excellence not only for the short term, but the long term.
The media and shareholders will continue to apply great pressure on corporate America until CEO compensation packages are more properly tied to overall corporate performance.
When a corporation is performing poorly and a CEO receives increasing compensation in the millions of dollars, it does not pass the smell test with the media and shareholders. It also does not make employees at the corporation happy either, especially sales professionals who are paid largely on commission tied to sales. Look for these important groups: shareholders, the media and employees to continue to work separately and together to apply greater pressure on corporate America to change the current paradigm regarding CEO compensation.
Ironically, there is a huge opportunity for a U.S. based CEO of a global or national corporation to own the highest bracket of integrity built on a reputation of truth regarding compensation issues. Who will be the CEO to own the mantle? Is there a courageous and true leader in corporate America today? If so, when will he or she step up?
To do so, this CEO must think beyond self and truly lead based on a new paradigm. The current CEO compensation paradigm is broken. Personal gain must not be the goal. Corporate gain through honesty, transparency and accountability must be the only goal. Many are talking it, but very few are walking it. The slippery slope also starts with you. Will you help make a difference? It starts with having the courage to do the right thing, no matter what.
Remember, do the right thing when your reputation is in crisis and seek the counsel of an experienced reputation management expert. It will be a major challenge, but ultimately the rewards of repairing your reputation will be great. Why? Because Your Reputation Is Everything!™
About Mike Paul
Mike Paul is editor of The Reputation Doctor blog. The Reputation Doctor is a nickname given to him by various clients. Mike's blog is located at www.ReputationDoctor.com. He appears regularly on Fox News Channel, CNN, MSNBC, Court TV, ABC News, ESPN, CBS News, BBC, and others as a weekly contributor and expert in the global news regarding corporations, CEOs, celebrities, athletes, politicians and other public organizations and public individuals with reputations in crisis. Mr. Paul is also president and senior counselor of MGP & Associates PR (www.mgppr.com), a leading strategic public relations and reputation management firm based in New York. For interview requests, speeches, senior counseling or other business opportunities with Mr. Paul, call 212-595-8500 or email info@mgppr.com.
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