The Conundrum of Executive Pay

Executive pay, especially so-called "excessive" executive pay, is once again getting quite a bit of press. Companies that receive bailout funds have pay restrictions placed on them as part of the package, although that still doesn't prevent them from buying new jets.

On one hand I think companies, and their shareholders, should have the freedom to pay whatever they like.  If they feel they need to pay more to get someone of exceptional caliber or with a unique background, then so be it.  They still need to look out for the health of the business, in both directions.

On the other hand, the reality is that those those same boards often aren't looking out for the health of their businesses, and hire people the drive poor performance, and even give them massive sums for leaving the mess they created behind.

Executives that can manage massive global companies are a rare breed, especially those willing to make the personal time and family sacrifices to do so.  Executives that can create transformative value at much smaller companies are also a rare breed.  One example would be the likes of Steve Jobs, who nearly single-handedly resurrected Apple, and even now causes the value of that company to change by billions on news of his health issues.  Or is that an indication of lack of leadership depth at Apple?

We are quick to complain about the lavish incomes of CEO's, but don't begrudge movie stars, book authors, athletes, and pontificators like Al Gore and assorted ex-Presidents.  When you compare value delivered versus income received, is there a difference?  Here's a video that asks a similar question, although my next paragraph also describes the problem I have with their presupposition.

Yes, in many cases there is.  For some reason boards continue to hire, and hold onto, executives that produce poor results.  A movie star that turns in a poor performance is given maybe one or two more chances before their star is tarnished and their asking price plummets.  NFL coaches are fired on just the inkling of short-term poor performance, athletes traded, TV shows cancelled, and ex-Presidents... well, never mind.  Bad example.

Executives should be measured on a bit longer time scale, but they should still be measured and held accountable.  Golden parachutes for pathetic performance isn't exactly accountability.  At the same time, if someone like Jobs creates billions of wealth of main street shareholders should we cap the limit of his income?  Probably not, but hard questions should be asked about leadership depth.

Boards, and the shareholders they report to (if we have to remind you...), are becoming more active.  More and more companies are providing for shareholder votes on executive compensation plans, the most recent being Intel.  These range from votes on the detailed dollar specifics to a vote on general ranges.

Intel Corp. has become the latest company to let shareholders vote on its executive-compensation policies, showing that more big corporations are reacting to concern about high executive pay and indications that Congress will take action. The computer-chip maker will give shareholders a nonbinding vote on its pay policies -- a "say on pay" vote -- at its annual meeting in May, said Intel Corporate Secretary Cary Klafter.

Bingo-hall operator Littlefield Corp. last year asked shareholders to vote on whether its CEO's and directors' total compensation was "within 20% of an acceptable amount." [it was supported]

There are some holdouts, including my example of Apple.

Many U.S. companies, including Walt Disney Co. and Apple Inc., argue against the move.  Opponents say it's hard for shareholders to parse complicated compensation schemes and difficult for companies to know what such votes mean.

Baloney.  Yes there are a bunch of "complicated schemes" out there, usually including such complicated provisions as paying a $30 million payout if the executive is fired for poor performance.  I can understand why it would be "difficult to parse"... or difficult for the company to explain.  It should be.  And a shareholder vote of "that's too complicated" or an outright "that's nuts"... means "that's nuts."  Deal with it.  That's part of the root of the problem itself.

Don't cap compensation, but don't hide behind a screen of complexity either. 

Comments

[Rick Bohan]

Maybe I missed them, but I haven't seen anything suggesting that Steve Job's income be limited or capped.

Here's what's happening: stupid and greedy people are being paid hundreds of millions of dollars for abject failure. Then they are coming to us to pay for their abject failure, all the while insisting that any strings tied to the funds that they insist we hand over, including a restriction or two on providing themselves further millions for being stupid and greedy, would be "socialism".

You say "Executives that can manage massive global companies are a rare breed...". Apparently so. On the other hand, executives willing to take our money to pay themselves lavishly while they insist on carrying out the same failed strategies and policies that brought them to the public trough to begin with seem not to be such a rare breed.

[Jason Yip]

You may be interested in this article, http://www.strategy-business.com/press/freearticle/08208?pg=all&tid=230. Not even short-term performance affects anything.

I'm very skeptical that any of the compensation has anything at all to do with the ability to attract people with "exceptional capability". I suspect that in in most cases, when we think we see "exceptional capability", this is actually an illusion caused by attributing to individuals what we should be attributing to systems.