As Henry Ford more than alluded to in his quote (above), the only way a company can pay wages to its workers and management is to have customers (or advertisers) support their products and services. To take this one step further, it is a successful company who has the resources to pay its employees well. With all employees, and especially those most highly placed in the organization the “value exchange” that results in fair pay is very much a two way street.
Employee commitment, ethical behavior, and working hard at the right tasks all improve company success, and with increased profits companies can pay better wages. The most vivid example of this can be seen with the CEO, although unlike most other employees the CEOs pay is set down in a contractual form.
In Michael Graham’s soon to be released book, A Principled Approach to CEO Contract and Compensation he says: “The way to approach CEO contracts and compensation is unambiguous: the contract should be reasonable given the circumstances and the reward structure must guarantee that your CEO is rewarded for the things that will help the company not only survive, but thrive in any economic situation. And further that the rewards do not encourage activities that are in any way detrimental to the company and its stakeholders.”
In his 40 some years of consulting to Board and companies Graham has come to realize that many organizations, consultants, lawyers, HR professionals, and CEOs don’t understand the fundamental rule of compensation: “People do what they get paid for” so pay people for what you want them to do. It’s a complex endeavor to make sure that the CEO is properly paid and motivated to enrich not just himself but also enrich the company and all its stakeholders.
Why is this so difficult? Graham says that there are five basic problems. First, the entire “value exchange” between the CEO and the company he leads and its broad implications is not well understood by the key participants, second there are just too many participants and no “orchestra leader”, third the wrong team is asked to negotiate the relationship, fourth they have the wrong tools, and finally most of all they don’t follow a principled approach to the negotiations of the relationship.
That is quite a laundry list of issues. But, each can be addressed and resolved. Over the next several weeks we will look at these issues and highlight some of the findings in Graham’s research and his forthcoming book. But for this blog, let’s start at the beginning.
The Larger Context
In order for your CEO employment contract and total rewards strategy to be successful, it must align with all of the organization’s unique environmental factors; key stakeholder issues; vision, mission, and values; and business and people strategies.
Every organization is unique, and has its own industry environment, key stakeholders, business strategy, organizational capabilities, and people strategies. We believe success in meeting the challenge starts with the realization that each organization should have its own unique CEO employment relationship or “value exchange” consisting of a reward strategy, linked closely to these areas and an employment agreement respectful of the organization’s needs but also its values. Organizations who don’t understand these considerations when designing their employment relationships—or worse, companies that ignore these areas completely—end up with employment relationships that don’t attract, motivate, and retain, but rather confuse, irritate, and sometimes even damage the reputation or cause the bankruptcy of the organization.
Remember you need the right plans, people, tools, and a lot more than luck to insure your CEO is properly paid, but as we have described above, it is best to start at the beginning.