Executive Compensation and Lake Wobegon? Really?

A colleague from Minnesota sent me a link to this Washington Post article this morning, "Cozy relationships and peer benchmarking send CEOs' pay soaring." He's not in HR, so he must have sent it because this quote tickled him when he read it in St. Paul, home of Garrison Keillor and gang:

" . . . the practice (peer benchmarking) has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the “Lake Wobegon” effect."

My friend may have also liked the sensationally designed graphics that you see when you click on "View Full Graphics." It's under the first-page trend line comparison of average earnings of employees to total compensation of executives.

The Washington Post obviously doesn't think "all the women are strong, all the men are good looking" in the Csuite. Nor did the New York Times back when I wrote about their financial analysis of executive compensation earlier this year. But why revisit this sad old story?

Because it's important that we notice something. It's a small start, but it's something. Investors, employees and the public are finally starting to learn about executive compensation -- instead of just shaking their fists in the air or hiding their heads in the sand. Little by little they are beginning to think about what all this money means and how someone qualifies for it. They might not like the answers they get, but the fact to emotion ratio is improving.

For many companies, there was a NIMBY reaction to Say on Pay.  But now look what's happening.

I got another email, almost at the same time this morning. This one, from WorldatWork, included a great video interview on the shift that is occurring in shareholder communications on executive pay. Blair Jones, Managing Principal, Semler Brossy Consulting Group, encourages companies to give up on obfuscation (yes she says it out loud) and talk with key investors. "Get out in front" of CD&A season, by meeting with key investors and learning what's on their minds. How do they evaluate the CEO's performance? Does it match the company's story?

What a wonderful turn of events! Almost "above average," you might say. Check it out.

Margaret O'Hanlon is founder and principal of re:Think Consulting.  She has decades of experience teaming up with clients to ensure great Human Resource ideas deliver valuable business results.  Margaret brings deep expertise in total rewards communications and change management to the dialog at the Café. Before founding re:Think Consulting, she was a Principal in Total Rewards Communications and Change Management with Towers Perrin. Margaret is a member of the Board of Directors of the International Association of Business Communicators (IABC), Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University. Creative writing is one of her outside passions, along with Masters Swimming.

Comments

[E. James (Jim) Brennan]

Bruce Ellig first discussed "the ratchet effect" in compensation many decades ago, but it is always important to remind folks of these constant dynamics. The phenomenon of one-way escalating demand engineered through careful one-upsmanship has been well documented in Congress by the Waxman Committee on Executive Compensation Conflicts of Interest Among Compensation Consultants and in academic research such as that by Wei Cen and Naqiong Tong on "Compensation Consulting Independence and Ceo Pay" published just this year.

After all, how many times have you been asked to survey smaller lower-paying enterprises for salary comparisons?

[Dan Walter]

Margaret,
Excellent observations. Considering compensation is "all about the numbers" it is funny that the math of percentiles seems to escape most people's attention.

It is not so much that Amgen or a similar company wants to be in the 75th percentile of their peers. It is more than peer groups are so narrow. If peer groups were expanded to truly include a full dynamic listing of both small and large companies that are reasonable comparisons we may find that a company like Amgen is paying its CEO marginally too much, but much smaller companies are paying their CEOs FAR to much in comparison.

I would love to see an academic study that created proposed peer groups, based on different criteria that represented more fully that spectrum of CEOs and other c-suite positions.

Of course, no one wants to me in the 5th percentile, but my guess is that even the lowest paid CEO in the Washing Post data is far above median when compared to a more complete peer group.

[Margaret O'Hanlon]

Hi Jim and Dan. Thanks so much for weighing in. Let's face it, the sampling selections are just one way, and the easiest way, for the exec to get the money they've been wishing for. What about a comparative sample of three other companies? And so on.

But now that there is a public conversation about how this is coming about, you'd imagine that more of the key investors will be asking pointed questions. At least it will be a trend to watch.

Especially if there are more eye to eye discussions, as Blair Jones was suggesting. It's hard to have a relationship when all you talk about is what I want (and get)!