Shareholder Spring

 

Evidence is piling up that out-of-control “Carpet Land” compensation levels are not only unfair, they are counterproductive. It’s not news that paying corporate leaders outrageous amounts of money concentrates their focus on raising their paycheck instead of corporate health. We have known for decades that all the excuses in support of the multimillion dollar deals are just that, excuses.

Ten years ago (August 9, 2002) in a USA Today piece, management guru Jim Collins reported that in a five-year study his organization had been unable to find any connection between compensation levels and the success of the companies they studied. Collins said, “If you have the right people, they will do everything in their power to make the company great, no matter how difficult the decisions and largely independent of their stock-option packages.”

In the same article Collins noted that you don’t have to pay the big bucks to keep talent on board. “Retention” is the favorite “excuse” of Compensation Consultants brought in to advise the companies on what they have to shell out to keep their Carpet Land inhabitants in place. Collins noted that more often than not, an insider promoted into the top spot did a better job.

Today the evidence is piling up that skills from one job are not transferable to another organization. A study by the John L. Weinberg Center for Corporate Governance at the University of Delaware found that CEO skill sets do not move easily to another company. This cuts the legs out from the retention rationale and with it the Compensation Consultants’ favorite tool to feed the endless how-high- can-you-go pay scale race, the sacred “Peer Group Benchmark.” The consultants pick a group of companies that they feel are relevant and use their compensation levels to set their clients’ compensation; a method that keeps CEO paychecks on an ever upwards spiral. In a NY Times interview the lead researcher on the UofD study, Charles M. Elson, said, “It’s a false paradox, a peer group is based on the theory of transferability of talent. But we found that CEO skills are very firm-specific. CEO’s don’t move very often, but when they do, they’re flops.”

Apparently shareholders are fed up as well. Shareholder voting on compensation is growing increasingly negative in what’s being called “Shareholders’ Spring.” In Europe where executive compensation levels are considerably lower than here in America, the shareholders are outraged. New York Investor Relations Guru Gene Marbach writes that, “the French government is considering the imposition of pay limits on executives at companies in which it owns a majority stake. Pay will be capped at 20 times that of the lowest paid worker in the company.”  

That’s reminiscent of a few decades ago when ratios in America were 40 times the pay of the folks at the bottom of the pay scale. Today it can run as high as $1,000 to a CEO for every $1 paid the folks on the bottom. Ethically, morally, or for that matter practically, there is no way to justify this kind of wage disparity.