If It Looks Bad, It Probably Is

Here they come, those who question the pay-for-performance credentials of the current executive pay process.  Every Spring, like daffodils popping through the warming ground investigative articles appear and challenge the validity of how the executive suite is rewarded.  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 follows is usually a series of back-and-forth 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 repeats itself.  Such has been the case for years.

In my mind though, it is the proverbial "man in the street" or "court of public opinion" that truly matters.  And if you take that point, that it is the general public who needs to be convinced that our corporate leadership isn't gorging themselves on financial largesse like hogs at a feed trough - then the multiple explanations that appear each season touting the rightness of executive pay fall disappointingly flat.  

Unfortunately it is not the negative impressions of the general population that is being addressed by these pundits, but instead you find that a complex argument is often presented in support of those who are being challenged, the executive leadership themselves.  This is a circle-the-wagons strategy crafted by status quo enablers to refute challenges to the current executive reward process by providing a technical defense that would not be understood by that same general population.

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

Another senior executive cautioned me that if I couldn't sell my proposal on a single sheet of paper, including a lot of white space, then my arguments wouldn't convince him.  In other words, keep it simple, keep it clear and keep it brief.

All too often the defense of executive pay is presented as a series of formulaic methodologies to be utilized by corporate leadership (with the support of consultant intervention) to refute their critics.  However, even as these diverse calculations try to make their point the wider audience will remain confused, skeptical and unconvinced, so how has the argument been advanced?  The reward system will still look bad.

I support the idea of measuring 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.

Apologists for executive pay often fail to discuss / explain a key element of pay that looms large for the rest of us - determinants of "how high is up" or how much is "enough" reward.  Given that for similar performance non-executives typically receive considerably less reward, it is disappointing that this disconnect in thinking is so often ignored.  A large portion of the looks bad environment is the amount of the reward.  Should 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?

The problem connecting a pay-for-performance concept with examples of executive pay excesses is an optical one - it looks bad!  Attempts to rationalize the process 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 is how they are rewarded in their own lives.

Why make rocket science out of a basic concept?

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.  With over 30 years Rewards experience 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. 

Image: Creative Commons photo by Civilian

Comments

[E James (Jim) Brennan]

Rocket science is clear and relatively straightforward, compared with executive compensation, which follows no such well-established universal rules of science. Rather than struggle with convoluted 'splainings (see Lucille Ball in "I Love Lucy"), one might as well simply point to entertainers in sports, music, film, TV, news (now also an entertainment industry per the prophetic movie "Network"), etc., who produce absolutely nothing of value for obscene remuneration amounts. Why not pay executives like rock stars? After all, their pay comes at the cost of shareholder profits, and if the owners agree it is proper, rational, reasonable and defensible, then outsiders can freely boycott the firm’s goods and services just as they refuse to watch TV, view sports, go to the movies, buy DVDs, listen to "news" or pay for concerts.

For further comparison, why should lottery winners get so much money just as a matter of chance? At least executives have to do something to justify the pay their shareholders promise in their contracts.

[Chuck Csizmar]

Rock stars who don't sell get forgotten; professional athletes who don't win get cut. Executives who don't produce results somehow manage to hang in there with their big bucks. In fact, they'll make the argument that competitive pressure demands that someone with their responsibility should command large compensation as a right - regardless of business results.

[David Marshall]

I thnink your point about "amount of reward" is key. I believe any exec team signing off on a comp plan needs to be able clearly articulate (on less than one page!) a couple of key points: 1) HOW much do they expect to pay for below, on target and above target performance (eg. fully describe the pay curve for the CEO - dont just talk in detailed formulae) and 2) WHY the pay curve needs to be graded this way - that is, what are the underlying pay for performance prniciples that drive their thinknig. I am not maknig a judgement call when I say that compe design is typically unclear on these bed rock principles

[J. Benton Howie]

While I believe that most top executive compensation appears to be excessive, and, in fact may actually be out of proportion to their actual contributions....in the US it is what it is. It is what is believed must be paid to attract and retain the best business leaders. As long as most companies will pay it, it may actually be what must be paid. And unless the general public's disgust with excessive compensation negatively effects the bottom line of a corporation, their opinion really doesn't matter....unless, of course, they take their disgust to the ballot box to influence congress to place limits on private sector executive earnings, or muster up the collective energy to stage an economic boycott. Corporations answer to their shareholders, through their boards of directors. There was a recent move to place executive compensation recommendations on annual shareholder ballots as a non-binding referendum. Some corporations adopted this practice; many did not.

In actual practice, executive compensation is seldom questioned for ostensibly high performing executives at high performing companies. I don't hear much grousing about executive compensation for Google or Apple, and the general public were generally silent about the compensation of Jack Welch during his leadership of G.E. The relationship of executive compensation to company performance should be questioned for low performing companies. But, again, that is a matter for the corporate boards and compensation committees. However, I do believe that there is general disgust from both shareholders and the general public for huge parachutes for failed executives. I have never understood why this practice is allowed to continue. But, then, who would disallow the practice?

[E James (Jim) Brennan]

While there are limits on executive compensation in the U.S., they can be evaded fairly easily. Most people are totally unaware of the statuatory limitations. Due dilegence and Sarbanes-Oxley requirements have produced improvements, because executive pay has fallen markedly as companies have struggled over the last few years. But that just makes the extreme outliers more egregious than ever, like the utility baseball player making a few million with a sub-par batting average and a high error rate. One wonders what they see in him. Maybe he's a synergistic team influencer. As long as it is their money, they are allowed to waste it as they please.