A Totally Crazy Executive Pay Idea

Say on Pay is the new norm in the United States. Three years of work and we are starting to fall into a pattern.  In Europe and much of the rest of the industrial world, it has been around long enough for there to be strong proposals for new reform. The arguments for continued reform are that executive pay is not aligned with shareholder returns and it is way, way, way too high!

Whether executive compensation is too high is largely dependent on whose pay you are looking at. I have written before about hundreds of thousands of CEOs whose pay is unlikely to draw any outrage from the average person much less investors. In a free market economy, it is unlikely there will be a cap put in place although tax reform or other regulations may once again be used in an attempt to curb the rise of the tippity top of executive pay. (WARNING: These things tend to not work as planned.)

The issues of better aligning pay with shareholder value and goals are far more nuanced. Do we align pay with specific shareholder desires? Should a company listen the demands of a shareholder who invested purely to garner a quick short-term gain at the expense of the company’s long-term health? What is a reasonable measurement of success and how can we ensure that pay programs can evolve as this opinion changes?

For nearly every argument against the rise of CEO pay there is a counter-argument based on data or the risk of upsetting the entire system. Let’s face it. For the most part, the system generally works for investors and executives. It may not always work for the rank and file but that has very little to do with aligning pay to shareholders.

So here’s the crazy idea.

What if investors had the voting power of their holdings weighted by the length of their investment in the company? The longer a share was held the more power of the vote (perhaps with full power coming at 3 or 5 years). Even more revolutionary, what if the power of the vote was dependent upon the shareholder staying invested in the company for at least the same measurement period as that imposed on the compensation program?

What if the executives had to give up some or all of their potential severance packages in return for this mind of commitment from investors? Could such a thing even be devised?  Would this type of program be executable for any reasonable length of time?

My guess is that few investors would jump into this kind of arrangement. I would also guess that most executives would be unlikely to see this as useful. But, absent any amount of self-control by the executives (and those who advise them) and any balanced and committed investing by the largest shareholders we will continue to see flawed regulation or the need for an entirely new voluntary covenant between shareholders and executives. Which do you see as a more likely possibility?

Dan Walter is the President and CEO of Performensation and is focused on the needs of small and mid-sized public and private companies. Dan is working with fellow Compensation Café writers, Ann Bares and Margaret O’Hanlon on a new ebook on communication to be released very soon. Meet Dan in May at the upcoming GEO Conference and World at Work Conference and in June at the Silicon Valley NASPP Conference where he will be the Keynote speaker. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, “GEOnomics 2011” and “Equity Alternatives.” Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Comments

[Ann Bares]

Very interesting points and suggestion, Dan. Perhaps makes way too much sense to ever be adopted in a world where few parties seem willing to embrace solutions that compromise their self-interest in the service of something bigger.

[Jacque Vilet]

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" --- Upton Sinclair

[Jacque Vilet]

Agree with your suggestion. Something's got to break the logjam.

[John A Bushfield]

Dan - Interesting approach. The attention executive pay is receiving lately is driven by the increasing income disparity in this country, and a general lack of understanding about the subject. Trying to modulate executive pay levels won't fix either phenomena. As you point out, the vast majority of CEO's receive reasonable compensation. Are some high visibility executives paid excessively? Sure. Will adjusting their pay make any difference? Probably not. Unfortunately, executive pay has become the whipping post for extremely complex social and economic issues. We'd be better served by focusing on the real issues rather than beating up on a few highly paid business people.

[Dan Walter]

One of my goals for 2014 is to open up the dialogue about new/different/better solutions to the major pay talking points, including:

Executive Compensation
Minimum Wage
Internal Pay Equity
Correct pay vs. what surveys might say
Strategic and cultural pay alignment

While this executive compensation suggestion is unlikely to be supported by companies or investors, it is an attempt to show a different perspective on a long-term complaint from all sides. It would be great to see more ideas at the edges (besides capping pay or doing nothing) to help define the potential "box" that houses all of our solutions.

[E. James (Jim) Brennan]

What's in it for them? Without mutual advantage, there is no motivation to voluntarily change anything. If compelled by outside forces, there might be mutual agreement on the least onerous option. What makes sense to someone without any stake isn't necessarily welcome to those with vested interests. Outsiders are interfering in THEIR business.

Why not simply shift the proposed solutions into the parallel worlds of entertainment, media and sports? There, even the worst major league players are millionaires. Any rational solution imposed to "solve" excessive compensation should apply to movie stars, supermodels and media personalities, too. Makes no sense to flog CEOs who work for a living and wink at folks making much more for playtime activities. Right?

[John A. Bushfield]

Insofar as executive pay is concerned, trying to address the issue through legislation is a futile and misguided exercise. Even if something were to get cranked out it would likely have no teeth and lots of unintended consequences. Besides, being a CEO is no cake walk; they shoulder a huge responsibility to deliver high quality products and services, many of which we cannot be without.

What executives get paid is up to the board and the shareholders. Sports figures get paid a lot because 1)they can,and 2)somebody thinks they are worth it. Plus, they add value in the form of entertaining millions of fans. The same is true for media stars. And, regardless of one's opinion of the obscene amount of money being paid to sports and media figures, these people have unique skills and are very good at what they do. They also work really hard.

On the subject of obscenity, consider the investment banker on Wall Street. Many of these folks earn income that makes sports and media comp look small by comparison. These people add no real value of any concrete nature, and are in the business of profiting off of other peoples money.

The point of all of this is that, like the old saying, 'beauty is in the eye of the beholder'. What's excessive to me might not seem excessive to you. Getting wrapped around the executive compensation axle is like being on a Merry Go Round; it's a nice ride but you end up pretty much where you started.

[Tony Bergmann-Porter]

"My guess is that few investors would jump into this kind of arrangement. I would also guess that most executives would be unlikely to see this as useful."

- which then invites the question "cui bono"? Shareholders don't want it, executives don't want it, and the government wouldn't want it (lower executive pay = lower tax revenue). Any other opinions are, to be blunt, irrelevant.

[Dan Walter]

Jim,

While I believe the amounts paid to sports and movie stars are comparable in value, they are not comparable in how they are conceived, designed, approved or even why the payments exist at all.

As for investors being outsiders, that is truly a key issue. Once you are willing to accept "financing" by selling some of your company to the public, you open the doors to having "partners" with different interests than your own. That should be expected, but is often misunderstood.

The concept of linking shareholder commitment to the power to control the company is all about turning outsiders into real partners.

[Dan Walter]

John,

As you note, it is unlikely that any type of forced "modulation" of executive pay will work as planned (or at all.)

I agree that most executives, especially CEOs, don't walk away with anything too impressive when compared to the work they put in. We must also remember that the "star" CEOs are somewhat like star NFL running backs. They both take a lot of hits and have fairly short careers in the position. more on that here: (http://www.compensationcafe.com/2012/07/ceos-and-nfl-running-backs-swift-careers-for-those-taking-the-big-hits.html)

I hope this conversation continues.

[Dan Walter]

Tony,

The great thing about the Compensation Cafe is that we can discuss ideas that are unlikely to happen with the goals of backing in to solutions that may actually be possible.

As Henry Ford once said (or so the internet like to tell me): "If I had asked people what they wanted they would have said a faster horse."

Sometimes the Comp Cafe is a bit like science fiction. We discuss best case or worst case scenarios. We discuss perfect solutions. We talk about how a company can create a solution in a perfect world. All of that is designed to spur thought and discussion with the intent that something better will emerge.

Your comment about the government, not withstanding their constant complaints, wouldn't want lower executive pay is interesting. I discussed that possibility in a prior article and would love to hear your thoughts: http://www.compensationcafe.com/2012/03/executive-compensation-the-political-taxation-conspiracy.html

[Tony Bergmann-Porter]

Dan:

There's a famous Teddy Roosevelt quote (I'm too lazy to look it up) about the guy in the arena vs. the critic. On the one hand, that would seem to be quite appropriate here. (You = guy in the arena; Me = critic)

On the other, and in this particular case, I submit that you are offering a non-solution to a non-problem.

I've suggested to Ann that I will write a guest column on a related issue. We shall see if I can cash the checks my mouth writes.