Expert Perspective by Grahall’s OmniMedia Editorial Board
In his article published April 22, 2010 in Business Week (The real outrage is how CEOs are paid, not how much) interviewer Geoff Colvin, writes: “ It’s outrage season, formerly known as proxy season, when recession-shocked Americans get furious at the new list of insanely overpaid CEOs… The bad-boy headlines will misleadingly suggest that CEO pay levels overall are a problem. They’re not. As outrage season progresses, we’ll hear plenty about this year’s crop of egregiously overpaid CEOs. Let’s just remember that far more hazardous to shareholders is the irrationally paid CEO.”
We wholeheartedly agree! But we also believe that the “pitchfork crowd’s” anger over excessive pay is improperly directed at the CEOs. Those running the show when it comes to CEO pay are the individuals on the Board of Directors who are to blame when CEO pay is inappropriate for any of the reasons stated in the article (or for a host of other reasons you can read about in our blogs), Boards have made a myriad of mistakes when setting CEO pay and perhaps the most egregious is following the “benchmarking herd”.
As we said in our blog “Multi-Dimensional Executive Compensation”, benchmarking is and should be a significant item in the toolkit that boards and consultants use to help set CEO and other executives’ pay. But to rely on benchmarking as the sole or primary method in determining CEO pay is overly simplistic and ignores a broad spectrum of appropriate considerations. This is because benchmarking only addresses “money” and neglects to fully account for the “mix” of rewards and the “messages” those rewards are sending. Grahall’s approach to designing executive compensation programs is to focus on a total rewards strategy approach, using money (the level of rewards), mix (the allocation of rewards among salary, incentives, benefits, etc) and messages (how the rewards drive desired business outcomes) to help a company structure an effective rewards program that links rewards to its organizational and business strategy.
We expand on this point in our blog “Of Peers and Paradoxes” saying: “Where Boards only use – or heavily rely on peer groups for compensation decisions, those Boards are effectively abdicating their responsibilities. Peer groups show the compensation determined by OTHER Boards for OTHER CEO’s. Our recommendations for consideration of peer groups are:
1) Keep them large, as small groups can create strange anomalies, and may not be statistically significant
2) Separate the companies that are currently comparable, from those that are aspirational – particularly with respect to pay level
3) Never “cherry pick” peers, as that creates a subjective rather than objective result
4) Always supplement peer group considerations with other information and insight. Peer groups should never stand alone as the sole data point used to determine a CEO’s compensation opportunity.”
All that being said, in this case, the exception does not prove the rule. As we said on our blog “The Hurd Locker”, CEO pay and bonus numbers are very big, and with millions of Americans still unemployed, it appears there is a lot to be angry about. But on the other hand it is important to consider a few facts that might provide a more balanced perspective… there are entrenched boards who are just the handmaidens to the CEO, but again that is the exception, NOT the rule. And we need to remember that it is the Directors and the Compensation committee members who have the information necessary to make the decision about compensation.
If you would like a thoughtful and insightful perspective on the state of CEO and other executive pay access Grahall’s Executive Compensation Research Report Series that examines the level and mix of executive pay at publically traded companies. Our research shows that “executive compensation should be considered within a strategic framework that includes many factors such as environment, stakeholders, business strategy, and people strategy. Not only does this more expansive approach provide a rational approach to evaluating executive pay, but when fully considered as part of a pay strategy, it sends the right messages to shareholders and executives.”
Contact Grahall’s OmniMedia Editorial Board at firstname.lastname@example.org.