by Gael O’Brien
Boards engaging in fear-based executive compensation only fuel its excessiveness. They perpetuate the leader-as-savior myth, seek to appease investor short-term focus, and undermine the potential for collaborative leadership needed to drive sustainable long-term success.
In the U. S., depending on the study (and universe of companies), CEO pay can be 231 to 380 times greater than the average worker’s salary. In other countries, the ratio is far less: in Britain, a CEO is paid 25 times more than an average worker, in Germany the ratio is 11-1, and Japan, 10-1.
What we’ve allowed the market to bear in the U.S.defies logic, both from a U.S. perspective and especially when compared to the ratios in other countries. Salary isn’t a recognition of who is the best CEO; it is about what one can negotiate.
Complaints about excessive executive compensation, escalating over the last 30 years, have become a closed loop problem – a complex quagmire laden with rationales for the status quo – with no seeming solution.
Yes, executive compensation is out of control, the argument goes, but what’s the alternative? When a U.S. board of directors offers a compensation package loaded with a salary several times more than the rest of the executive team – plus stock options, stock awards, buy-out awards, deferred compensation, high pension value, incentives, bonuses and a lucrative golden parachute – it is to lock in its designated rock star.
New research may shift that paradigm. A September 2012 study by the University of Delaware’s Weinberg Center for Corporate Governance disputes conventional wisdom that CEOs can easily move to the next company if not paid well. Competitive pay is “driven by the false belief,” the study says, “that CEOs are interchangeable.”
The study, “Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution,” argues that “The necessary skills to successfully run a company cannot be acquired besides through the actual experience at the company; therefore executives are not typically transferable between firms.” The research findings also attack the flawed and inflationary peer group benchmarking methodology that boards often rely on which ratchet up pay “seemingly unrelated to the performance rendered.”
Instead, the study says, “executive compensation should be done within the context of the organization as a whole.” Performance should be measured on the basis of internal metrics and benchmarking as well as external considerations, but not overly reliant on “looking externally to other organizations.”
These and other study findings offer compensation committees alternatives to an approach that both perpetuates a false market and harms organizations. When a CEO is paid excessive compensation, it impacts the rest of the organization, affecting morale, trust and engagement, as well as perceptions of the value of one’s work compared to others.
One of the worst by-products of excessive executive compensation is that it can reduce leadership to a hired gun role in which it is all about numbers; the role of purpose, mission, values, and culture in creating business success is given no voice.
Inevitably, being all about the money infects the attitudes of investors who take it out on the CEO; live by the numbers, die by the numbers.
Consider recent upheavals at companies where seasoned CEOs have been forced out over numbers. Angela Braly, chairman and CEO of WellPoint, resigned as result of investor pressure resulting from disappointing earnings. Underperforming share price and investor pressure led to Andrea Jung’s being replaced as CEO, though she stays as executive chairman for two years. Both leaders made this year’s Forbes’ list of the top 11 highest paid female CEOs.
Aviva and Barclays are among other companies whose CEOs have left amid shareholder protests.
Whether an outside CEO is picked or someone is groomed from within the company, there is no crystal ball to determine who will succeed. There is no corollary evident between how much a CEO is paid and the positive impact he or she has on the organization.
One benchmark boards would be advised to consider is how well a CEO can engage people at every level of the organization to work with him or her in service of the company’s mission, purpose, stakeholders and business goals. That engagement and sense of community (in good and challenging times) may not always impact next quarter’s profits but the signposts of sustainable success will emerge.
If the findings of the Weinberg Center study are heeded, there will be additional benefits in reforming how CEOs are compensated. It is time to retire the rock star messiah myth – it generally disappoints. It discounts the notion that a leader who inspires others to work collaboratively toward recognized common goals creates success beyond the numbers. It is also time for investors to be re-educated; they need to learn to better manage their expectations – in this very uncertain world – about what a company committed to its purpose and the success of its stakeholders is working to achieve each day.
The boards’ fear of losing perceived CEO stars and investors’ fear of not seeing their investment increase consistently each quarter have distorted the lens of business success. Tackling excessive CEO compensation is the first step in creating a new normal.
Gael O’Brien is a Business Ethics Magazine columnist. Gael is a consultant, executive coach, and presenter focused on building leadership, trust, and reputation. She publishes the The Week in Ethics