Posts Tagged ‘CEO Pay’

It is Absolutely All Relative

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There are important question shareholders, boards, the media, and the public should be asking when it comes to CEO pay, but it’s not necessarily “how much”.  In her April 6, 2013 article for the New York Times, If Shareholders Say ‘Enough Already,’ the Board May Listen Gretchen Morgenson writes, “Last year, the median chief executive at a United States company with more than $5 billion in revenue received about $14 million, 2.8 percent more than in 2011, according to an annual pay analysis conducted by Equilar. The 2012 increase, though relatively modest, still represents a raise for most of those who inhabit the corner office (and whose companies had filed the data by the end of March)…. Do this year’s figures show any evidence of progress toward a new pay paradigm? You know, where the gap between the compensation of executives and workers narrows, or where company directors put shareholders’ interests before those of the hired hands?” 
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Pay for Performance is More than Pay for Shareholder Return

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Expert Perspective by Grahall’s OmniMedia Editorial Board

Several articles were published in the Wall Street Journal drawing from the Journal’s Survey of CEO Compensation conducted by the Hay group.

The articles all tout the fact that CEO pay is up (according to the survey) but so too is shareholder return.  As Joann Lublin writes in her article Paychecks for CEOs Climb, “The chief executives of the largest U.S. public companies enjoyed bigger paydays in their latest fiscal year, as share prices recovered and profits soared amid the country’s slow emergence from recession.”  Is this really “pay for performance” as the articles seem to suggest or is a “rising tide lifting all boats”?

Our experience suggests that “pay for performance” requires looking at executive compensation in three ways: 
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Citi’s Board Thinks Their CEO Deserves More Compensation

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Expert Perspective by Grahall’s OmniMedia Editorial Board

The decision of Citi’s Board in 2011 to  “…compensate Vikram commensurate with the job of CEO of Citi” left our Editorial Board wondering if the Board is intent on communicating a “back to business as usual” message to shareholders and regulators.   According to Matthias Rieker September 20, 2010 article in the Wall Street Journal  (Citi Chairman Intends To Revive CEO’s Pay In 2011) “Pandit had pledged last year to accept only $1 in salary and bonus until Citi returns to profitability. Citi reported a profit for the first and second quarter this year, but Pandit still declined compensation above $1 for this year…”

But Pandit’s commitment to Citi seems not to be shared by his fellow executives, many of whom, we imagine, were involved in decisions that led to the decline of Citi’s stock from well over $50 per share in 2007 to its low of $1.03 in March 2009. 
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Is there any real importance to the ratio of CEO to average worker pay?

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Expert Perspective by Grahall’s OmniMedia Editorial Board

The September 17, 2010 article in Financial Times (CEO/employee pay ratios) again addresses the nagging question of the seemingly outrageous difference between CEO pay and that of the average worker but raises the question as to whether a larger or smaller differential is “better”.   The author writes: “Would you work harder if the ratio [between the CEO’s pay and yours] was higher or lower? So called ‘tournament’ theories of income differentials reckon that higher is better…[but] others say that the level of chief executive pay is obscenely high and that investors have a right to know which firms reward bosses too much relative to the peons.”

Peons?  OUCH!   But let’s not argue the semantics of arrogance. 

Say on pay is here to stay.  Companies who are outliers with relatively high executive pay will be loudly criticized. 
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It is not how big you are, it’s how big you play (John Wooden)

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Expert Perspective by Grahall’s OmniMedia Editorial Board

In his April 2, 2010 article in the New York Times, When a First Pick Isn’t the Best Pick  Richard Thaler writes regarding the NFL draft: “… the teams choosing early in the draft generally don’t, in fact, get the players that provide the most value per dollar.”  He goes on to say that “…the first pick in the draft is, on average, the least valuable in the entire first round.”

He concludes his article with the following: “So, if teams’ ability to select players is only slightly better than flipping coins, should we expect that corporations can do any better in picking their chief executives? “

We found his article interesting and we agree with his premise, but also disagree with his comments and conclusions. 

There is an interesting book by Michael Lewis titled Moneyball: The Art Of Winning An Unfair Game published in 2003 that follows the unique and successful approach used by the Oakland A’s GM Billy Bean to draft players for the Oakland A’s.  Dan Ackman reviewed this book in May 28, 2003 for Forbes  and says: “It has long been an article of faith among fans and team owners–especially small-market owners–that the poorer teams could not compete with the richer teams, at least not for long. The A’s have defied this logic and embarrassed the economic determinists, including Bud Selig, baseball’s commissioner…”

So it seems that ‘paying top dollar for major league baseball or foot ball players can’t guarantee success, but talent management, whether athletic talent or executive talent, is all about the selection process.  And the selection process requires that the GM or Board of Directors know what characteristics are important in the talent they are looking for.  We disagree with Mr. Thaler’s comment that “chief executives hired from outside a particular company have been performing mostly in private.”  In fact, for all CEO’s at publicly traded companies, their performance is essentially reported all day every day with a 15 minute delay on the stock tickers.  That is hardly working in “private”.

Further, most CEO’s or individuals being considered for a position of a CEO are highly seasoned executives.  They have operated in their respective arenas for years and there is little comparison with rookie athletes, whose experience has been on high school and college fields.       

With any selection process, the human factor that influences the ultimate success of a new hire or even of a person newly promoted from within can never be predicted with certainty.  

So with all the unknowns what should Boards consider when looking for a new CEO?  Even though, as Thaler says, CEOs aren’t given IQ tests like NFL draftees, CEOs are certainly hired for their intellect.  But it is much more about the CEO’s ability to apply intellect and skills in the context of that job.  For the CEO it is more an issue of EQ (“Emotional IQ”) than IQ that would help to predict success in that job.    From our experience, great CEOs have certain characteristics: they have a great capacity for vision, they are outstanding communicators, they have experience in high visibility roles, they possess a business acumen and sharpness that permits them to make sound decisions with imperfect information, and they show political savvy and can successfully deal both up and down the chain of command. Perhaps the most important characteristic for CEOs is that they demonstrate outstanding judgment.

All that being said, it really isn’t how much a company pays a CEO that is important, it is how that pay is structured and what behaviors that structure drives.  As we shared in our blog Creating Quality Compensation, when designing CEO pay a company must understand its business strategy: including general, value chain and specific business strategies and align its executive rewards programs with these strategies.

Read more about how to design effective executive compensation on our blogs and in the book Effective Executive Compensation by Grahall’s Michael Graham.

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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We Agree!

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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.
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Cash is no longer king…

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Expert Perspective by Grahall’s OmniMedia Editorial Board

The April 1, 2010 article published on msnbc.com “Executive pay slips for second year in a row: First time back-to-back declines occurred in 20 years; top CEO makes $52M” says: “Top company bosses saw their pay decline further in 2009, the first time in two decades that it has fallen for two consecutive years, according to a new analysis.”

With the ratio of CEO to “average worker” pay still at an astonishing 300 to 1, many might find the concept of a “slip” in pay to be laughable.  Others might argue that it is simply an indication that the stock market hasn’t recovered fully and the executives are still “suffering” from loss in value of their substantial equity positions.  But we prefer to take a more hopeful view on this now 2-year “trend,” and most certainly from a process and transparency point of view, things have changed for the better. 
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“The truth is… never simple” (Oscar Wilde)

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Expert Perspective by Grahall’s Omnimedia Editorial Board

A March 23, 2010article in Free Press (freep.com) by Brent Snavely (Mulally compensation hits $12.87M at Ford Union angry about white-collar pay) got our Editorial Board talking.

Snavely says: “Ford President and CEO Alan Mulally’s compensation of $12.87 million in 2009 might look unreasonable to some, but it is based on smart executive compensation practices, experts say.”

Snavely quotes Daniel Moynihan, principal of Compensation Resources saying of Mulally’s compensation: “It looks like they have a true pay-for-performance package there. Their stock price is doing well, and his fixed compensation went down.”

Yes, Ford did very well in 2009 as compared with other car companies and some other companies in other industries. And to its credit, Ford did it without the need for government support. But it is simplistic to compare Mullaly’s compensation and Ford’s stock price and conclude that it is ”true-pay-for-performance.”
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Walking on Water For the Rest of Us Mortals

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Expert Perspective by Grahall’s OmniMedia Editorial Board

The March 12, 2010 article “Closer Look at Berkshire’s Executive Compensation Policy” author Ravi Nagarajan says:  “Berkshire Hathaway’s 2010 Proxy Statement was released yesterday and… Mr. Buffett’s total compensation remained at $175,000 which included $100,000 of salary and $75,000 in director’s fees from the Washington Post… The $100,000 salary for Mr. Buffett and Mr. Munger has remained constant for 29 years, during which time inflation has eroded over 60 percent of the purchasing power of a dollar… Mr. Buffett has over 98 percent of his net worth in Berkshire while Mr. Munger’s family has over 80 percent invested in the company. Both men wish to set an example by ensuring that their fortunes move in lockstep with the results for investors…”

Although this stance is very admirable on the part of Messrs: Buffett and Munger, it is  a formula that would be neither commendable nor wise in most other companies.
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The Hurd Locker

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Expert Perspective by Grahall’s OmniMedia Editorial Board

The March 11, 2010 article from The Economist print edition (Cheques and balances: Efforts to reform how bosses’ salaries are set are unlikely to work) begins: “SPRING is in the air, bringing with it angry thoughts about executive pay. This year the economic downturn is adding extra emotion to the season’s familiar fury…There is even a new fad nicknamed the “pity bonus”, paid to bosses who failed to qualify for a big enough payout under the established bonus scheme due to the unforgiving economy. Mark Hurd, the boss of HP, was given an extra $1m bonus on top of the $15m he received under the firm’s annual incentive scheme to reflect the board’s view that he had not been “fully rewarded” for relative outperformance against competitors…” 

(The article also bashed IBM, GE, Starbucks, BP and Goldman Sachs for their executive bonuses.)

Yes, the 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.
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