RSS 2.0
“Obscene” CEO compensation: A Remedy
Do CEO’s make too much? Recently many observers have complained about “obscene” compensation levels for American CEOs. Forbes (May 3, 2007) noted that in 2006 the chief executive officers of America’s 500 biggest companies “got a collective pay raise of 38%”. Examples listed by Forbes included Steve Jobs of Apple who had $647 million in restricted stock; to the fifth on the list – Terry Semel, of Yahoo with $174 million.
In 1965 the average CEO earned 20 times as much as the average worker. By 2005, according to the Economic Policy Institute, the ratio was 262!!
What is happening here? The Business Roundtable argues that CEO pay is not exorbitant. Their analysis of the data shows that the average increase in CEO pay over a ten-year period is roughly the same as the average growth in corporate earnings. That begs the question: why didn’t workers’ wages increase at the same rate? Some observers place the blame on greedy CEOs who presumably set their own pay, aided and abetted by directors and compensation consultants who stand to benefit from a cozy relationship.
But people do not change dramatically over the years. I don’t believe that today’s CEOs are any more or less greedy than those of past years. They might be a bit more cautious, though; because of the recent high profile disasters at such companies as Enron, Tyco, and Worldcom, corporations are watched more closely nowadays, and corporate governance is more transparent than it was a decade ago.
I believe that a more likely explanation can be found in looking at the combined impacts of technology and globalization.
Over the last decade or so, companies’ investments in information technology for personal productivity and enterprise integration have significantly reduced the ranks of middle management (see for example Pinsennault and Kramer, Organizational Science 2002). It is from the ranks of middle managers that we draw the next CEOs. Yet, while these reductions mean that the pool of candidates eligible for senior management is shrinking, the number of corporations has been steadily increasing (approx. 10% over five years).
At the same time, globalization has resulted in extended supply chains that require new managerial skills. The traditional global supply chain involved building a product in one country, then moving it for sale to customers in another country. As the tasks involved become more finely divided, supply chains have become more extended, and managing these requires different skills. US corporations need to provide middle managers the time and opportunity to gain those skills, but the managers who survived the downsizings and corporate reorganizations are stretched pretty thin.
Growing demand for a dwindling pool of capable and experienced managers force corporations to pay exorbitantly high wages for the managers that may be good. And the evidence shows that many many managers can not make the jump to CEO and perform at expected levels.. Last year, the CEO turnover rates reached a peak of 16.2% in the US, according to a Booz, Allen and Hamilton study. Umesh Ramakrishnan, from head-hunters Christian & Timbers noted: “The current trend shows clearly that boards are laser-focused on performance, quality and results.” And in the Nov. 11, 2007 Sunday NY Times Nelson Schwartz notes, “Other experts insist the problem [is]… the skill of the individual chief executive and his or her top team.”
So what should US corporations do? They need to develop careful succession plans – a task that was less critical back when the pool of experienced middle managers was large. Today, that is no longer so. It is a case of supply and demand. Today’s CEO succession plans need to clearly specify skills gaps, particularly in relation to technology and globalization. Where gaps are identified, they need to be closed by ensuring that they work with business schools to develop executive training programs for middle managers and through Executive MBA programs such as offered by the Saunders College of Business.
I am not sure the problem can be boiled down to a “supply and demand” issue to to “greed”. If it was a supply and demand issue, one would expect to see a tighter link between performance and pay – which is not there. In addition, why would we not see similar trends in European companies? (http://www.faireconomy.org/files/pdf/ExecutiveExcess2007.pdf) Part of the problem is an issue of poor governance, where there is little active oversight of the most powerful people in the corporation by other stakeholders, such as board members – who are often picked by the CEO and are many times not active managers – and shareholders, who do not have the numbers or ability to coordinate action in a way that changes company policy.
I read your post with interest. I believe that before a succession plan is put in place, all organizations should go through a benchmarking exercise to ensure that their executives are on par or ahead of their peers in their positions. Too often, I see boards embarking on succession planning only to discover that they have a lean bench which then prompts an extensive review of the existing leadership talent. If only they reversed this process, they would find that succession planning becomes a lot easier than the usual headache it becomes.