The top executives of companies are different than regular employees. They should be; they can drive profitability and performance more than anyone else in the company, and the stakes of their decisions are much higher. When it comes to the compensation of CEOs, though, there is a disconnect from the rest of the organization that isn’t supported by necessity or evidence.
First, though, let’s look at me. I’m an HR generalist in my mid-thirties, and the head of HR for an 800 employee company that services grocery and retail stores world-wide. It’s my second CHRO job, and I live in Connecticut. So naturally, I’d like to be the VP of HR for Yale University. It’s closer to my house, after all. Sure, they have 14,000 employees, and a $2B budget, but once you’ve been in charge of HR in one company (and remember, I’ve been in charge of HR in two companies!), you can really apply those principles anywhere.
But, I’m pretty new in my job, and I like it here. I do see that the top Yale University officers average over $400,000 in salary. So, because Yale’s head of HR makes several times what I do, I should at least be able to get my pay doubled with this information, right? I mean, if that doesn’t happen, I could always leave and go to run Yale HR!
Neither of these scenarios is plausible for me in the near term. I don’t think Yale will return my calls, and my best case scenario with my boss is that I give him a good laugh. We pay based on what the individual brings to that particular organization, not based on benchmarks of dramatically different organizations.
Unless, of course, we’re talking about the CEO. Open up any proxy statement, and you’ll find several pages discussing just how the board arrived at the pay for their CEO. This is a response to criticisms of CEO pay in the past; boards are trying to be more transparent. For example, United Technologies (second biggest company in Connecticut) lists 24 “comparable” companies that it uses as a basis for comparison on page 23 of their proxy statement.
Charles Elson and Craig Ferrere have just published a study detailing why this methodology isn’t helpful (their paper was also discussed in this weekend’s New York Times). The implication behind this kind of benchmarking is that a CEO could pack up and leave to any one of these companies, so the board needs to pay them competitively to those companies. Of course, these companies are doing the same thing, and creating an echo that feeds on itself.
Look at the United Technologies list. UTC is a big defense contractor and aerospace manufacturer; they also make elevators and air conditioners. That’s a great base of experience, but Proctor and Gamble, Johnson & Johnson, or Pfizer probably aren’t going to reach out to the UTC CEO to run their consumer-heavy businesses. “CEO” isn’t some magical skill set that transcends industries; its 40 years-worth of experience that can help drive a company that they understand intimately.
This is the point that Elson and Ferrere make. Benchmarking CEO compensation to that of CEOs in other industries implies that you think there’s a risk of your CEO being courted by one of those other companies. There isn’t; in fact, they point to other studies that internally promoted CEOs fare better than outside “hired guns”. They suggest that boards approach the CEO like any other employee – if the CEO comes to them with a competing offer from another company, they can make a counter offer. Otherwise, they’re inflating CEO pay “because everyone else is doing it”.
As rank and file compensation professionals, we’re often not in the room when these compensation decisions are made. But, next time you end up sitting next to a board member at dinner, you can bend their ear about making CEO pay more based on reality than hypothetical comparisons.
As for Yale, we should talk. I think you’ll find me very affordable, relative to several peers that I’ve selected!
Steve Gifford is the Director of Human Resources for Eurpac Service, Inc., a diversified Retail and Grocery brokerage. When he has HR thoughts that aren’t about compensation, he blogs about them over at Fistful of Talent. You can follow him at @BaghdadMBA.
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