Here We Go Again

Early every year, like daffodils popping through the warming ground, investigative articles will appear to challenge the validity of how executive pay is determined.  Critical commentaries by notable Compensation experts, as well as a financial analyst here and there, will question whether job performance has warranted the amount of financial rewards reported in proxy statements.

What will then follow is a series of speeches and written pieces both criticizing and defending the logic of the executive reward process.  However, those who press their divergent viewpoints seem unable to reach consensus on an equitable process, and so next year the cycle of reward and debate will repeat itself.  Such has been the case for years. 

The court of public opinion 

In my mind though, it's the proverbial “man in the street” that truly matters.  It's the general public who need to be convinced that corporate leadership isn’t gorging themselves on financial largesse like hogs at a feed trough.

Unfortunately though, it's not the negative impressions of the general population that's addressed by these pundits, but instead they offer a complex argument in support of executive leadership.  This circle-the-wagons strategy is crafted by status quo enablers to refute challenges to the current executive reward process by offering a technical defense that wouldn't be understood by that same general population.

Somehow the vagaries of earnings per share, the global marketplace, political volatility, shifting consumer demand, import-export regulations and the price of oil become mushed together in a rationalization for why leadership deserves more money, in spite of performance.  It's as if business results have nothing to do with pay. 

And that view will be supported by the high priced consultants who themselves are paid by the same leadership that's being challenged.

I recall a former CEO once telling me, it’s a matter of optics; the present system of determining executive pay looks bad to the general public.  No amount of confusing formulae or charts and graphs is going to change that impression; the more complex the defense the more skepticism that will be generated.   

Can we not measure the results achieved (performance) to gauge the amount of reward?  Who can argue with that?  But the process being described by those touting the current approach is flawed by its complexity, by its confusing array of acronyms and ultimately by its inability to explain itself in laymen’s terms.

Do as I say, not as I do

Apologists for executive pay often fail to explain a key element that looms large for the rest of us – determinants of “how high is up” or how much is “enough” reward.  Given that for similar poor performance non-executives typically receive considerably less reward, it's disappointing that this disconnect in thinking is so often ignored by those examining executive pay practices.  A large portion of the looks bad environment is the amount of the reward.  Shouldn't those on “mahogany row” have parameters for their rewards, even maximums or caps like the rest of the population?  That sounds fair, doesn’t it?

Attempts to rationalize the executive pay practice with complex terms, charts and theorem won’t convince anyone outside of the board room.  The way to change that negative impression is to challenge the convoluted methods that executives use to rationalize their reward structures.  The general population (not the financial analysts, proxy readers or even compensation specialists) wants to see a direct cause and effect (simple, clear and brief; performance equals reward), as that's how they're rewarded in their own lives.

Why make rocket science out of a basic concept? 

Unless the fix is in.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Creative Commons image courtesy of muffin

Comments

[Jacque Vilet]

Agree totally Chuck. I disagree with the statement though ---- "Given that for similar poor performance non-executives typically receive considerably less reward, it's disappointing that this disconnect in thinking is so often ignored by those examining executive pay practices."

Maybe it's just the ones that hit the media, but to me it seems that "pay-for-performance" does not exist for execs. So those with less performance seem to get royally rewarded anyway. And I think the public responds negatively.

Employees don't understand why they are laid off and the executives get large payouts. He/she may have met the incentive targets but it still seems "fishy" to the public.

Showing simple cause and effect would be great.

[Jacque Vilet]

Oops! Delete the first paragraph of my comment above.

I need another cup of coffee --- or more sleep!