Nothing Average About Them

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Expert Perspective by Grahall’s OmniMedia Editorial Board

In his article “A Banker’s “Market” Worth: It’s A Rigged System”, JonathanTasini not only wants to lead the pitchfork crowd against “… 
the obscene bonuses and pay given to bankers and the financial mandarins who destroyed the economy.” But it seems he also wants to sell his book “The Audacity of Greed”. 

He does make valid points in his 1,300 plus word diatribe, but to suggest that market forces and competitive pay are not important to appropriate decisions on compensation is absurd. However, we do agree that the games played in this arena are well deserving of criticism and have long caused inflation in executive pay.

There are two key issues: first is the problem that some companies seem to think they are in Lake Woebegone (borrowing from Garrison Keiller)  “where all their executives are above average,” regardless of performance. The best thing a company can do is pay for performance.  If the executive is a key individual in the organization and is delivering on difficult goals, then perhaps he is above average and should be paid so.  If he is mediocre, then the company’s best bet is to pay him as such, and perhaps he will leave (rather than be fired and due a severance).

The second game that is played is in populating the competitive landscape for market research and analysis.  If the “peer group” is a small number of hand-picked companies that force your company into the 10th or 25th percentile, then the compensation numbers for even average performers will be dramatically higher.  And clearly these “peers” are hardly similar to yours.

Both these games and the issues they create can be easily corrected if the compensation committee or its consultant is thoughtful enough to recommend using more data points that are more relevant.

So how can market rates and competitive pay considerations be more effective? 

At Grahall, our competitive assessments (Board of Directors compensation, executive compensation, long-term incentive strategy, etc.) start with forming a group of peer companies to which we can compare our client’s data.

The primary peer group is selected based on similarities to the client’s company across industry, service, product, and revenue and market capitalization. 

Often, a second peer group is established that we refer to as the Aspirational Peer Group. This usually includes firms that are larger in size as compared to the client. The client “aspires” to be like these larger firms. The data from this peer group is NOT combined with the primary group nor is it used in the determination of executives’ pay.  It provides information only and can help the company to understand where it needs to move to achieve its aspirations.

Companies that play in the inflation game with executive compensation need to be concerned about more than Mr. Tasini’s wrath or even that of the “pitchfork crowd.” They may lose investors as well.

As we said in our Investor Alert “…Where all the Executives are Above Average,” Whenever the executive compensation program is targeted at the 75th percentile for the purpose of retaining management that is delivering 50th percentile performance, there is a disconnect.  Call it simple, but to pay above-average compensation for average performance just isn’t attractive to investors.  So if the organization states that it pays 75th percentile for target performance, then before you invest, make sure that actual performance is at the 75th percentile as well.

Contact Grahall’s OmniMeida Editorial board at edie.kingston@grahall.com

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