The Top 10 Ways to make the world of CEO pay a better place
Expert Perspective by Grahall’s OmniMedia Editorial Board
Jena McGregor says in her September 20 article for Business Week “Even Most Directors Think CEO Pay is Too High” based on results of a University of Southern California Marshall School of Business survey released in September, that “A majority of directors—the people who actually make decisions about CEO pay packages—believe CEO pay packages need trimming…. [but] an overwhelming majority say it’s not at their own firms.”
In a very “Gaston and Alphonse” way, either these directors don’t think the problem is theirs or they don’t want to “go first” to fix it. Some organizations won’t have the liberty of waiting for the next guy, though. The TARP companies are under the scrutiny of Kenneth Fienberg and his looming “formulas” (see OmniMedia blog The Secret Formula) and the Fed is proposing that they have oversight of bankers’ pay (see Cait Murphy’s October 6, 200 article for Money Watch “Analysis: The Fed Shouldn’t Decide Bankers’ Pay“). Perhaps the kick start from the government in those industries will give boards the guts to really investigate the nuances and particulars of their own CEO’s pay and determine if it is appropriate, or not.
McGregor goes on to say that, although directors feel that some 50+% of CEOs are overpaid, they “… don’t want government to do much about it… [because] government-imposed limits on executive pay would “greatly decrease” the effectiveness of pay plans.” MCGregor asks: “But if that’s what they believe, what do they plan to do about it?” She continues “The survey, which queried 140 directors in August at U.S. corporations, shows an extraordinary lack of accountability.” That’s a strong statement. Is it true? Perhaps it is in some situations, and without a doubt these are the situations that draw the headlines, along with congressional and public outcry.
While discussing this topic, one of our Editorial Board members mentioned a dinner table conversation he had recently with his 4-year-old daughter Scarlet about behaving badly. Scarlet asked, “Didn’t these people go to Kindergarten?” “Why?” asked her dad. “Well”, Scarlet said, “in kindergarten we learn to take the blame for what we do.” “Or the credit,” added Dad.
That got us thinking that maybe some of the Board members just need a refresher course in some basics of the Kindergarten code of conduct.
Top 10 lists are popular today, so we drew one up. The first five we’ve pulled from an Elementary School’s code of ethics. For the second five, we looked to time-worn aphorisms, almost as good a source for common sense as the mouths of babes.
If Directors followed these rules, the world of CEO pay might be a better place.
1. Responsibility: Answer for your own actions. Don’t make excuses or blame others for what you do. The board of directors has the final say on everything critical to the company. If you haven’t had the final say in the past, make sure you do in the future. Don’t let management set the agenda.
2. Action: When you agree to do something, do it. Don’t go back on your commitment and wait for others to act, as in “After you, my dear Alphonse.” Go first. With very rare exceptions if the performance goals you set for management aren’t achieved, they don’t get the performance pay.
3. Honesty: Speak the truth – respectfully. Doing so will help you earn the trust and respect of others. Also speak all the truth. If you say your consultant is independent, make absolutely certain they are. Provide shareholders with all the information they need to be informed about the company’s compensation and reward strategy.
4. Cooperation: Do your best to work with others. Be open-minded; listen to the views of others. Boards need to be responsive to questions and concerns shareholders and other “stakeholders”. Concerns expressed by these groups should not be dismissed simply because they are seen as “fringe” or “uninformed”. If, in fact, shareholders are uninformed, it may in part be due to the Board’s failure to provide information.
5. Self-Control: Think before you act. And consider the consequences. There will always be consequences. There are a minimum of four areas or groups impacted by any Board decisions: organizational, employee, shareholder, and financial.
6. Strike while the iron is hot – Yes – as per above – walk, don’t run. But get moving, for God’s sake. The TARP companies will get a shove from the government, but the time is now for boards of directors everywhere to act.
7. A stitch in time saves nine – In the court of public opinion, the companies that walk the talk and take the action needed to create reasonable, carefully crafted rewards strategies – linked to business and people strategies – will be recognized and rewarded.
8. Money talks – That is, the amount of money. But so does the mix and the messages. Without all three “M’s” (in Grahall speak) you don’t have much of a compensation strategy.
9. A Penny Saved is a Penny Earned – And several million dollars saved by trashing an out-of-date cookie cutter rewards program is several million dollars earned.
10. Know what you know, and know what you DON’T know – Get objective advice from trained and independent professional advisors. And get all of the information necessary from management not just what they think you need to know.
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