A few weeks ago I was having lunch with a friend who’d read about a retired German executive getting a fat pension to the tune of €200,000.00 a year.
‘Why are they giving him all that money when he’s no longer with the company?’ he asked.
I tried to break it to him gently. ‘It’s probably just a fixed percent of his salary.’
Bracingly I added, ‘You might even get the same percent, just less, ah, you know, money.’
He stared at me. ‘This is normal?’
‘Well, it’s actually a bit low,’ I admitted. I then related some juicy golden parachute anecdotes.
He stared at me, the German executive with his measly pension forgotten.
‘But… why?’
Why indeed? I considered how to answer that question. Did I want to sound wise or flippant?
I could explain how market research is used to create competitive compensation packages. I could talk about popular theories of executive compensation design. Or I could discuss free market theory and how executive salaries reflect the wealth they create.
Except I don't buy any of that.
Exorbitant severance packages have nothing to do with improving company performance or upholding shareholder interests, any more than CEO salaries are actually driven by Adam Smith’s ‘invisible hand.’ If they were somehow tied to performance we might think of them as long term incentives but typically they are not.
Executives rarely if ever sign a pre-nup agreement.
Golden parachutes were initially created to attract top executives by mitigating their personal risk, particularly in industries prone to mergers and acquisitions. They were also supposed to promote impartiality, i.e., executives shouldn’t feel constrained from making the ‘right’ decision by possible termination.
But while they once may have served to attract un-gettable top talent, over time they’ve become standard practice. Otherwise known as vested interest.
So now you’re thinking, all this talk about pay for performance to create business value and we’re handing out get out of jail free cards?
(And where can I get one?)
The thing to remember is that the person trying to stretch a miserly half percent increase across the organization and somehow tie it to performance probably isn't the person proposing executive compensation to the Board.
Executive compensation is typically proposed by a compensation committee reporting to the Board. Members tend to be Board members of other organizations and include at least one CEO or former CEO.
Right there we have enough information to see where this is going. I wrote a more detailed blog post about executive compensation if you'd like to read more: Executive Compensation: The Real Risk.
But glossing over how the social dynamics of an elite group of business leaders may conceivably bias their ideas about executive compensation, suffice it to say that most of them have golden parachutes of their own.
In the end, I gave up on sounding wise and opted for flippant.
‘Because they can.’
Cartoon courtesy of Joshua Kennon.
Laura Schroeder is a Compensation Strategist at Workday, headquartered in Pleasanton, CA. She has nearly fifteen years of experience designing, developing, implementing and evangelizing global Human Capital Management (HCM) solutions and holds a certificate in Strategic Human Resources Practices from Cornell University. Her articles and interviews on HCM topics have been published in the US, Europe and Asia. She lives in Munich, Germany and enjoys cooking, reading, writing, kick boxing and spending time with friends and family. If you want to read more from Laura, check out her talent management blog Working Girl or follow her on Twitter @WorkGal.
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