Executive Compensation: What the Conversation Can Tell Us

In a terrific guest post late last month, Steve Gifford looked at the “cult-ure” of CEO pay. In particular, he dissected why the typical method for determining CEO pay – assessment based on CEO pay at “comparable” companies – is highly flawed.

With Steve’s post top-of-mind, I then read this Economist article arguing why CEOs are not overpaid, including this nugget:

“[Steven Kaplan’s (Chicago’s Booth School of Business)] argument is well-grounded and intricate. He distinguishes, for example, between ‘estimated’ and ‘realised’ pay. Estimated pay is the estimated value of the CEO’s pay, including stock options, when the board does the hiring. Realised pay is what the CEO actually makes when he exercises his options. There is a big difference. …

“[Kaplan] starts off by questioning the idea that CEO pay always goes up. Granted, it shot up between 1993 and 2000. But since then it has fallen. Average estimated pay for the bosses of S&P 500 companies has declined by 46% since 2000. Median CEO pay has declined since 2001, though only slightly. In 2010 CEOs were paid about as much in real terms as they were in 1998.”

This last statement got me curious on when CEO pay and compensation became part of our lexicon. I ran a quick Google Ngram (which tracks the frequency of words appearing in books during a set time period). As you can see illustrated below, I charted CEO pay (blue), executive pay (red), CEO compensation (green) and executive compensation (yellow). For the record, I originally charted this beginning in 1800 just to see what would happen, but none of the terms even made a blip on the screen until 1900 (which isn’t really surprising).

 

Again unsurprisingly, conversation around CEO pay and compensation (green and blue) shot up in the late 1980s, but I am a bit surprised it wasn’t part of the conversation really at all until then. Executive pay, however, made a bigger impact beginning as early as 1950. But executive compensation is the real story here. Beginning in 1934 we see a sharp rise in the conversation around executive compensation that only continued over the years.

I’m not a compensation pro, so I was curious why. A quick search told me that prior to 1934, corporate executives did not publicly report their salaries or compensation in the U.S., explaining the sharp rise in the conversation as well as the continued sustained path for that particular term above the other three.

Otherwise, the trends for pure word usage align fairly well with the rapid rise in executive pay as compared to average workers. As perceived unfairness increased, so did the conversation.

What’s my point? Simply this: People notice. People question. People discuss. Yes, most understand CEOs bear more of the burden of decision making and more of the risk, but people also notice company results and pay are often disconnected. (And new research shows CEOs aren’t even the most stressed people in the organization.)

If your goal is to motivate and engage all employees to give their best every day, be sure you keep your finger firmly on the pulse of employee sentiment and discussion on this topic, too.

Compensation pros – please weigh in!

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[E. James (Jim) Brennan]

1. Yes, CEO pay staggered badly over the last decade and has barely returned to its old absolute levels. But note that the incumbent turnover means that the current CEOs are usually not the ones who saw reductions. And those drops normally occurred in actual payments from CEO contingent compensation elements. The current practice of less reliance on stock options and more use of stock awards and non-equity incentives is expected to reduce that voilatility. (No comment, except to note that the change will still NOT bring CEO pay down to Drucker-ratio levels.)

2. To my recollection, all the past research has pretty conclusively established the consistent negative correlation between control and stress. If you have a lot of one, you have less of the other. No control = high stress. In The Day, the most stressed employee group was the Executive Secretaries (now rebranded Administrative Assistants).

It is strange that as traditionally organized organizations disappear, the diminishing few at the top of their pyramids continue to stretch their relative lead over the vast majority. Perhaps this is why employers now emphasize granting more control to underlings, to reduce their stress in lieu of other remuneration.

[Jacque Vilet]

Well kudos to you Derek for taking on this topic. I've said enough about exec comp in the past so nothing more to add. Interesting stats.

[John A Bushfield]

Derek - It's probably me, but I'm not sure I get the point. Executive compensation discussions in the media have increased, in part, because of more media introduced over the decade or so (internet, cable/satellite TV, social media, etc.) which provide an outlet for such discussions. Prompted, as you point out, because of the increasingly large monetary gap in lowest paid to highest paid employees, not so cleverly disguised in the current political debate over the 'middle class'.

The organizational structure changes which will occur due to the changing business model we are experiencing will be accompanied, I believe, by radical changes in the way compensation is defined, prompted by a more egalitarian and holistic view of employee/employer relationships.

Since I have subscribed to the "Compensation Cafe" (admittedly for a short period of time), I have seen the above only hinted at. I'd love to see a more robust discussion.