Few topics in human resources management - and the general public - inspire more emotion than executive pay.
The CEOs of large US companies in 2007 averaged about $11 million each in total compensation. That's 344 times the pay of the average US worker. And several CEOs made hundreds of millions in compensation - and their businesses failed.
Think about that for a moment.
For comparison, in the early 1980s, CEOs of the largest US companies were paid around 45 times the average worker’s salary. In 1965, about 24 times.
Has the average CEO become that much more productive, that much smarter and that much more effective relative to the rest of of the working population? Trust me, I know some of these guys and nothing can be further from the truth.
The Boards of the firms that employ these CEOs, their compensation committees and external consultants defend these pay packages by saying this is the amount of money required to attract the kind of talent needed to effectively manage these businesses. Essentially, we are told that these guys are such geniuses that we have to pay them this kind of money or these companies will collapse.
Apparently, the wrong talent was attracted because under the leadership of most of these executives, their companies performed terribly. And some of these CEOs bankrupted their firms or in the case with the automotive industry, destroyed entire industries and caused millions of people to lose their jobs. And lets not even discuss financial services firms.
And their punishment?
Well, a very few went to prison, some were terminated (and walked away with millions and in some cases hundreds of millions in severance packages and other "retirement" benefits.). But most of the CEOs still have their jobs, in spite of their poor performance.
Debate over excessive compensation for the heads of companies has been a fringe topic for some time and I don't claim to have the answer. In fact, other than drastically changing the tax code, which has it's own drawbacks, I don't think executive pay can be regulated - nor should it be. There have been many approaches to executive pay reform including changes to securities laws and regulations in an attempt to strengthen the bargaining position of shareholders and attempts by Congress to restrain the growth of executive pay by eliminating the tax deduction for compensation paid in excess of specific caps.
None have worked.
I think the answer has to do more with character and leadership and the kinds of managers we are turning out of business schools and developing within our organizations. In other words, only the CEOs and executives themselves can change this - and maybe human resources can play an important role. Or at least try.
Warren Buffet once said that when evaluating executives, you look for three qualities: (1) Integrity, (2) Intelligence (3) Energy. He then says that if you don’t have the first, the other two will kill you. Integrity. Hmmm. As for executive compensation Buffet says the average person cannot do much about it and that it would take large institutional shareholders to withhold votes and pressure a CEO about it.
Buffet also is very critical of compensation consultants. So was Carl Icahn in his recent blog post Compensation Consultants Grease the Executive Pay Casino. Buffet says the practice of setting executive pay based on what CEOs in similar industries earn (a common practice of compensation consultants) is a "All-the-other-kids-have-one" approach and it's wrong. BTW, Warren Buffet receives only a $100,000 salary with no stock options as CEO of Berkshire Hathaway (the lowest CEO salary of the Fortune 500 companies). His worth comes from the fact that (a) he owns 31% of his company's shares and (b) as CEO, he has run the company exceptionally well since founding it in 1965. In other words, he has earned it - unlike so many CEOs running businesses today.
Buffet's partner Charlie Munger says:
"I think people taking compensation have a moral duty not to take it. Moral duty to be underpaid. If generals and archibishops can do it, why can’t leaders of large enterprise take less than the last dollar?"You can argue that some CEOs (like Buffet) have truly earned their excessive compensation. In these cases, the company is them - they founded it, they grew it and without them none of it would have happened. Some other examples include Bill Gates, Larry Ellison, Steve Jobs and Ted Turner. Ted Turner says in his new autobiography Call Me Ted ( a great read BTW) about Jack Welch:
"If it wasn't for Thomas Edison, Jack Welch would [not be Jack Welch]." Sure Mr. Welch was a great CEO but GE is a public company that existed for 100 years before he arrived and will likely be around for another 100 years. Did Mr. Welch really earn the hundreds of millions he was paid? It's a tough question.
Someone once said that 99% of decisions that CEOs make could be made by the average manager, but the CEOs get paid for the other 1%. The problem is most CEOs today aren't doing that great of job on those other 1% of decisions - or the first 99% in some cases.
In 2009, maybe HR executives and leadership development firms can lead a change. Or better yet, maybe CEOs will lead the change. I'm hopeful but I won't bet on it.
In closing, I quote Buffet again:
"Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood hero of mine. Hank's son, Steve, at one time was a player's agent. Representing an outfielder in negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he should ask for. Hank, a true pay-for-performance guy, got straight to the point, "What did he hit last year?" When Steve answered ".246," Hank's comeback was immediate: "Ask for a uniform."
Labels: compensation, executive pay, warren buffet