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.

How Much Is Enough

Apparently it’s all in how you look at it. According to a Governance Metrics International (GMI) study, on average CEO pay levels jumped 28% in 2010. And it gets worse. At the top, CEOs of “S&P 500” companies saw their income jump 94.2%. CEOs of “S&P Midcap” companies did even better; they got an average 123.5% boost in 2010.

At about the same time the GMI study was released, an article posted on CFO.com whined, “Ghost of Enron Wreaks New Havoc on Exec Pay.”  Written by an “Executive Compensation” Attorney, the piece goes on for several paragraphs about how certain tax dodges that were changed post-Enron are now resulting in those at the top of the pile being forced to pay more taxes. Poor babies!

The growing gap between the rich and the poor in America raises the ethical question, how much is enough? There is not a speck of evidence that these outrageous executive compensation levels create great leaders; quite the contrary in fact. Nearly a decade ago best selling author and business consultant, Jim Collins, addressed that subject in a USA Today OP-ED. His company found, “In a five-year study, after 112 separate analyses looking for a strong link between executive compensation and corporate results, we found no pattern whatsoever. If you have the right people, they will do everything in their power to make the company great.”

Take away? It’s the people, not the paycheck. Should executives be well compensated? Of course. But this out-of-control “Carpet Land” battle to take home the most bucks is insane. In way too many cases it is taking the focus away from leading the company and turning it to leading the pay scale.

A few decades ago CEOs earned about 40 times as much as the lowest paid employee in the company they headed; today 1000 times is not uncommon. So how did executive pay rocket out of control? Greed. Ego driven greed enabled by corporate directors who allowed it to happen; directors too often chosen by the CEO. These CEOs then conned them into hiring Compensation Consultants who –knowing which side their bread is buttered on– make sure they convince these compliant directors that they must boost executive compensation. And so a destructive cycle drives the bucks up, up and away.

Hopefully the stockholders will shake off this compensation culture, boot the consultants and others that drive this destructive practice and reign in executive compensation. After all, a stable society is built on a content middle class, an endangered species these days.

These top-dogs will still be able to afford the luxury goods that are flying off the shelves across America today, while those down the food chain worry about the basics. And maybe if the greedy don’t have quite so much extra cash lying around, they will stop speculating in oil and driving up the price of gasoline. That would be nice and it might just simmer down the growing discontent with life in these United States. How much is enough? Enough is Enough!