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?” 

We agree that is a good question and maybe even an important one, but it isn’t the most important or the only question to ask.  Let’s take a closer look at the information at hand. First of all Equilar’s research (or at least that which was referenced in the article) looked at companies with revenues in excess of $5 billion. Those are BIG (we mean REALLY BIG) companies, representing maybe only 2% to 3 % of all US companies. The information may not be consistent with or even relevant to the other 99% (…ok 97% to 98%) of companies. And a 2.8% increases for the median CEO at one of these behemoths sounds like a relatively small number.  However,  the pitchfork crowd isn’t so much focused on the percentage increase but the actual dollar amount. That would be the $14 million in pay and the nearly $400,000 increase in 2012. And again remember we are talking about the median – the guys right in the middle of the sample – not the guys on the high end or the low end.

The better question we think is not the wage gap or even the board’s governance, but is that pay (whatever that amount might be) right? And that question can’t be answered by looking at statistics. It is an individual, situational circumstance that needs to be considered for each company. It does speak to board activities of course, since the board approves the CEO pay, but it is the process by which this pay is determined that is most critically important – even more so than the actual amount – since if, in Grahall parlance, the 4M’s (market attachment, mix, messages, and management) are thoroughly analyzed in the pursuit of determining CEO pay, then the amount will be right.

This bring up another important point from Ms. Morgenson’s article, that of peer groups and bench marking. Peer grouping is the “new bogeyman” in executive compensation. Everybody hates it. Well maybe not everybody as it can easily be gamed to help escalate executive pay. Some experts even sermonize the elimination of peer group benchmarking in its entirely. Grahall’s position is that ignoring peer groups is akin to sticking your head in the sand. Seriously, the CEO and other executives are among the most important human resources in any company. Ignoring what competitors and comparators are paying their executives would be like ignoring what your competitors and are charging for goods and services. This is key market data that is critical to determining strategy, whether that be product strategy or compensation strategy. Are peer groups mishandled? NO QUESTION the answer is yes. Would eliminating them create better compensation structures for the company wants to retain executives? NO WAY. The war for talent is waging in the E-Suite and the most certain way to lose your best executives is to pay them in a fashion that makes the other guy’s offer look loads better. Peer groups and bench marking aren’t the problem — BAD peer group selection and warped bench marking approaches are.

But shareholders and the public at large are still frustrated by what looks to be excessive pay for the corner office guys. Not to go all philosophical, but the corner office has ALWAYS had higher pay. What’s different now to raise the hackles of the public and the media? In part it might be due to the fact that once upon a time, the American dream was that hard work  might not provide the worker with a vast improvement in his or her position or special opportunities, but their kids could still always grow up to be President or CEO or the next super star basketball player. Clearly that is not the case any longer, it takes money to make money and it takes power (in the form of cash, connections, and patronage) to become powerful.

But it is also true that shareholders are better off today than they were pre Dodd-Frank. Has Dodd-Frank solved the problem of egregious pay practices? Not entirely. Can it? The answer there is “no” as well. But if Boards, shareholder, the media, and consultants (of course) stop looking solely at “how much” and turn their attention to “how”, the executive’s compensation might still be a large number (relatively and absolutely) but will more likely be justified and appropriate.

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