Summing Up
The Dodd-Frank legislation provision requiring the publication of the ratio of CEO compensation to that of the average compensation level of all employees in public companies will have little or no impact on CEO compensation levels. That's the conclusion of a majority of respondents to this month's column.
Several thought that the provision could have the desired effect. Yedendra Chouksey said, "What is open to public glare does restrain proclivity for 'insanely generous' self-rewards… So, why not try it and hope for some better discipline in (the) top executive reward system?" Ajay Kumar Gupta put it this way: "I believe revealing compensation ratio(s) will help inculcate values, honesty, and accountability in the organization."
Others were less sanguine. Zach Allen described it as a "futile effort … there is a mystique associated with being a CEO. Often the CEO is portrayed as 'the only person in the world who could do this job'… You can thank the financial press for this mystique." In pointing out the futility of the effort, Rebecca West commented that "the current exclusionary process of creating CEOs feeds into an elitist culture among executives that begin to view themselves as 'untouchable.'" Gerald Nanninga added, "If CEOs create a lot of wealth at their company and share it with enough people, they can get away with making themselves extremely wealthy… A few silly ratios won't change that." Paul Jackson pointed out, "There is already available in proxy statements what the compensation is. It's supposed to be public knowledge, except few of the public learn of it, and few investors, apparently, get upset." Ravindra Edirisoorlya said that "the market for CEOs decides the pay of CEOs." Kamal Gupta put it this way: "Investors care two hoots about it as long as the company is doing well and rewarding them well."
There was concern that the legislation might actually have the opposite effect of what was intended. Tom Dolembo commented, "Publicity will have the opposite effect … the information will support and raise current levels." Guy Higgins commented, "Recall that CEO compensation began to balloon only when the CEOs could see each other's comp packages and began thinking, 'I'm better than that doofus.'"
Ulrich Nettesheim raised a question for further thought: "Does increasing transparency and visibility of the ratios help increase the ability for shareholders and boards to make better choices?" He commented, "One of the best agents to advocate for the right level of pay will be CEOs themselves … informed individual judgment with a hefty dose of transparency goes a long way to doing the right thing." What do you think?
Original Article
Early in the Gulf of Mexico oil-rig explosion and leak disaster, BP agreed to activate a camera fixed on the source of the leak. Some people believe that simple act produced such a vivid, constant reminder of the enormity of the leak that it hastened actions that would otherwise have taken longer and been much less effective in stopping the leak and dealing with the cleanup.
Now comes a little-publicized provision of the Dodd-Frank legislation designed primarily to encourage Wall Street reform. In addition to the disclosure of the annual compensation of the CEO, the bill requires organizations with publicly held stock to disclose the median total annual compensation of all employees and the ratio comparing these two amounts. The intent is clear. It is to provide a periodic reminder to shareholders and others of the reasonableness of CEO compensation. We can expect a deluge of stories comparing the compensation ratios for various CEOs. Reporters won't even have to do the math behind the stories.
As a former director of companies operating in various parts of the world, I can report from experience that differences in philosophy concerning compensation, say between Europe and the U.S., pose real issues. Not only do European CEOs and board members regard U.S. levels of CEO compensation as bordering on insanely generous, they are wary of such things as stock options and other elements of U.S. pay packages. This can pose a real problem when senior executives are moved back and forth between continents.
There are legitimate questions concerning the Dodd-Frank provision. The first is measurement. As we have learned from the detailed explanations of top five executive pay packages required recently for public companies, the amounts shown in those reports can be highly misleading. For example, what are we to make of "out-of-range" compensation resulting from the excellent performance of the company? Or option awards that are intended to cover several years? Or options related to multi-year performance that happen to be cashed in a given year? Second, does this kind of transparency matter? There is little indication that investors pay much attention to the detailed compensation information that is readily available now.
Then there is the implicit assumption that a lower ratio of CEO to average compensation has a beneficial effect on an organization's performance. Presumably, the thinking is that greater equity in pay leads to a healthier culture (for example, in organizations like Whole Foods Markets and the Ben and Jerry's division of Unilever that actually set low limits on the ratio) that in turn accounts for some amount of added performance.
So the resulting questions are: Will moral suasion through such measures as the Dodd-Frank bill affect CEO compensation? Does it matter? What do you think?
- CJ Cullinane
I do not think the impact of Dodd-Frank will do much of anything of importance. Most shareholders knew and know that these executives were over paid. Even CEOs with abysmal track records made the 'big bucks'.Having the government track executive compensation is like having the fox watch the hen house, it just does not work. Investors have to take the lead and not just follow.
- Ajay Kumar Gupta
- Doctoral Researcher & Faculty, Tata Institute of Social Science
I think CEO compensation publicity will bring reform because this will reveal details of metrics and parameters of compensation. This will also lead to more clarity and transparency about activities carried out by CEOs in various companies. Comparison of pay on different rating measures will compel CEO either to perform or perish.CEO compensation publicity will make CEO more accountable towards stakeholders, people and society. Hidden clause about pay, promotion and opportunity creates dissonance among employees especially on lower level. It destroys trust and lowers commitment. Transparency in pay, promotion and opportunity promotes cultural trust, people trust and leadership sustainability in the organizations. I think installing camera makes people more aware and suspicious about how others think about them. It actually signals people not to make mistake within the structure but they can do elsewhere. When someone has intentionto commit crime, he or she may find the way to do it. No mechanism can prevent it. However, watching and observing activities all the time question the credibility of the person. Person might or might not be honest, but in either case it breaks the trust and credibility. So, reform is possible only when any activities foster people trust, cultural belief and reduce perception gap in the organization across all the level.
I believe revealing compensation ratio will help inculcating values,honesty and accountability in the organization. This will also helpful in preventing culture collapse and organizational failure because things are not hidden. For example when CEO of low performing organization gets more pay than the CEO of high performing organization, then it questions the corporate pay policy, corporate governance and the commitment of the people in key positions. So, Compensation publicity is one fabric of reform but looking past on some corporate failure like Lehman brothers, Satyam Computer failures (India), Enron Project failure, it clearly shows a trend of corporate decision and corporate transparency failure. And these are outcome of self interested decision, behaviors and activities. Therefore, I strongly believe that publicity related to CEOs activities, decisions, involvements will bring more reform than compensation publicity alone.
The other examples of Indian Public sector Enterprises show that pay and perks of Chairmen, CEOs, and top executives are publicly known to employees but still there exist major loopholes in the systems where frequent frauds take place. And most of the time it happens due to internal involvement of employees. The bottom line is that how to bring reform in actions, decisions. intentions and involvements of top people. And the partial solution perhaps lies in bringing in real accountability, moral responsibility and leadership commitment than just making it a part of policy statement. The key to reform is execution. Execution with honest and healthy feedback with reform, again feedback and reform will restore cultural trust enabling collective and integrative reform.
- Anonymous
Make a descent profit, descently....period.If this maxim holds true, the argument for reform is a moot point.
- Anonymous
When we live in a world order such that CEO's and upper management earn the equivalent of 100x to 200x the annual GDP of a small undeveloped nation, one would hope, and even pray, that such intrinsic publicity would spur and obligate such reform.- John Kervokian
- Managing Consultant, Kervokian Consulting
Honestly, I'm torn between 2 places.On a personal note, a large package for a CEO would be a huge motivational factor in aggregate (Everyone needs money except the few who has found causes greater than that, even then they'll require money to affect change).
On the other side you have the whole moral agency issue of whether the CEOs really do what they're supposed to do and would a large compensation package ensure alignment to stakeholder requirements?
The answers will be varied and fundamentally can be both answered by looking into the CEO's soul. But until such time that science can cross over to religion those secrets shall remain obscured.
To workaround that, we use physical external control factors to 'shape' CEO behaviours, and humbly; pay packages and the controls surrounding them are just one element of a many faceted problem.
Can we measure the societal impact of a CEO's decision?
Can we measure the CEO's ratio of accountability based on the number of decisions made? E.g. amongst his final authorization; how many signatures pad his? If the accountability is low, why pay so high?
Can we measure how detached or attached the CEO is with the company? The ratio of organizational depth and breadth and to what extent does his management horizon extend. I.e. does he happily accept a Chinese Forbidden City approach to managing?
Alas, can 1 person (with all their humanly failings) be able to steer an organization more complex than China in the 14th century?
http://builtforchange.blogspot.com
- Anonymous
Disclosure of 2 particular numbers and trying to make sense out of a ratio may not get us the desired results. In most of the cases the Compensation of an executive would comprise various heads that would be affected by various performance or market parameters and would be payable at various intervals of time. It would be very difficult to get a comparable number from different organizations.I think that there should be transparency in compensation norms of any public entity. The organizations should publish performance parameters and variation of executive compensation based on the organization's performance levels. This would help the investors and employees in general to assess if the executives are fair in setting the compensation norms.
The compensation norms should get approved from investors in advance and investors should have right to know if the agreed norms are followed. In case there is a deviation from the agreed norms, then the organization owes explanation to investors and regulators.
- Kamal Gupta
- CEO, Edseva Software
In India, it is already binding on public companies to not only disclose the CEO's compensation, but also that of senior execs drawing over a certain amount of pay.Investors care two hoots about it as long as the company is doing well and rewarding them well. At other times, obscenely paid CEOs, at least most of them, do volunteer to take a cut.
Who benefits from the disclosure? Head hunters for one. And vendors of savings products.
The Tata group, one of India's oldest and respected business house, does have a practice of a low ratio of top management pay to even blue collar worker pay. But then, they find it difficult to attract talent at the top level. Most of their C suite execs have grown within.
- Anonymous
- Consultant
Suppose you are running a company where the business model is "scalinig of an unsophisicated business". Maybe the majority of the field workers are paid $20 a hour which is a good rate for this type of unskilled labor. Further suppose that this is a publicly traded company. Do you want the CEO's pay tied to some multiple of the average worker? I don't if I'm a stockholder.I think Dodd and Frank need to find something better to do!!
- Gerald Nanninga
- VP, Retail Ventures
My understanding is that what investors really care about is not how much the CEO makes from the company but rather how much they personally make off their investment in the company. As long as investors and customers felt like they were getting a good return, they did not care what the financial sector CEOs were making. It wasn't until investors and customers felt they had gotten screwed that they turned anger towards CEO salaries.Bottom line: If CEOs create a lot of wealth at their company and share it with enough people, they can get away with making themselves extremely wealthy. If they don't create wealth or don't share it, then they are doomed. A few silly ratios won't change that.
- Anonymous
This is another attempt by the left to tear down our institutions and introduce European Socialism. It is not relevant to make this comparison easy for the press to demonize, tax and over regulate free enterprise. Lets just chase away all of leading companies go for 20% plus unemployment.- Giorgio Azzalin
- BWD ,LLC
I think that the CEO can be paid any amount, also an insane amount but with the blessing of the entities whose wallets are impacted.Not the board of directors, not an ethical committee, not a senate commission, but the stockholders . Inform the stockholders on the term of the contract and let's have a vote .If the CEO is cheap but incompetent they can only blame themselves.
It is too easy spend somebody else money ,I'm sure that the stockholders will surprise everybody how smart they are ( and how stupid the board usually is )
- Zach Allen
- consultant
It is probably a futile effort. The compensation that a few CEOs receive is irrelevant. The gap between the CEO pay and the pay of even other top ranked executives has widened in recent years, because there is a mystique associated with being a CEO. Often the CEO is portrayed as "the only person in the world who could do this job." That is sheer nonsense, and any CEO in a moment of truth would tell you that the job is not, cannot, done by one person alone.You can thank the financial press for this mystique. It is like sports. The mystical quarterback.
But, what really matters is that industry has become far too concentrated. The Bush administration just about shut down the anti-trust division, and I am afraid that Obama simply doesn't get it. Instead of breaking up companies that have become too big to fail, and are too big to succeed, we bail them out. Again, mystique. Paulson, Bush, Geitner, Obama, they all believe that the sky will fall if a Fortune 100 company fails.
This attitude totally defeats the discipline of a capitalistic structure, the only real justification of the capitalistic form of structure to start with. The flip side of rewarding success is allowing failure.
The larger the company, the more impotent the shareholder. The more importent the shareholder, the less influence the owners have over the paid hands, and the CEO is just one paid hand.
There is, in my opinion, the problem.
- Tom
- President, Baiting Brook Research/Chieftain Studio
I think Dodd-Frank is a step in the right direction, but I suspect corporations will find other ways to compensate executives to skirt the reporting requirements.Unless Wall St. starts viewing big executive pay packages as a negative when assessing a company's performance/outlook (sort of like the pot calling the kettle black) there probably won't be much meaningful change.
There really isn't much compelling evidence that paying corporate officers superstar compensation packages substantially increases a company's chances for long-term success. Most companies do well when the market is good, or they are in an up product cycle. The inverse also tends to be true. The corporate leadership team might influence the performance of the company in good and bad times but often they are just along for the ride.
Slashing costs and high-profile M&A deals - the things that make executives rock stars on Wall St. often have disastrous long-term consequences. How many times to we see a company flying high under the leadership of a highly compensated leadership team, only to see the company struggling to survive two years later?
It's the short-sighted focus of Wall St. (where 18 months is three eternities) that allows these lopsided pay packages to exist. I don't see that mentality changing any time soon.
- Phil Clark
- Clark & Associates
Smoke and mirrors. No matter what the law does believe me there will be interpretations and machinations that will skew the process. CJ (#1) started on the right track. If we need all of this process to track what is "right" we have issues. In fact, instituting this process tells us something isn't right. Can a single person be worth that much dollar wise to an organization? If the CEO dies tomorrow, will the company die?I am afraid it will open all CEO's to the pressure of perception and the press unnecessarily and that will be tragic. Especially in our 24 hours news world we live in today, these numbers will only fan the flames of talk shows and those on a quest to build a career.
Sadly I think business has lost perspective of how they fit into the world around them. Much like professional baseball and football it is facinating that some of the best players are not the highest paid players. In fact, how many times have you seen the highest paid actually have their performance deteriorate after the contract is signed?
If the board of directors were doing their job none of this would be needed. If shareholders really banned together to flex their muscles, fair compensation would exist. Looks like there is enough chances to compensate fairly, IF everyone involved in the business processes started raising their hands to vote as shareholders instead of pointing fingers.
- Rebecca Mott
I believe that the current exclusionary process of creating CEO's feeds into an elitist culture among executives that begin to view themselves as "untouchable." Why should I care how hard I work or how well the company performs if I am in a game rigged to make me a winner either way it goes?On another note, there are executives who have earned the right for the corner office and continue to earn their keep and perform. It is up to shareholders to create accountability that will keep executives on their "p's and q's".
Compensation for ALL employees needs to align with performance. This is not hard folks.
- Tom Dolembo
- Founder, NewNorth Institute
No. Publicity will have the opposite effect. In the Louis XIV atmosphere prevailing in the isolated and in-bred Boards of these pathetic companies, the information will support and raise current levels. Those of us who still read newspapers will sigh, smile and turn to the sports page. European companies are not run, by and large, by "professional managers". The CEO does not sit atop a Praetorian guard whose salaries are also set according to the CEO's level (forgetting the people who do the work). European CEOS also exist in cultures which have actually experienced recent enormous upheaval, who value stability and legitimacy because they lost it in inflations, wars and revolutions.I've said it before in this forum, there is a serious, basic, ground level revolution in the US occurring as we speak. It is happening at every level. CEO salaries, enormous spreads in income levels, polarization of class, elimination of opportunity are just symptoms. We have outrun our ideas. Publicizing CEO salaries is irrelevant because we can't do anything about it, CEO's have no real job description, and they exist as a cultural artifact. My first CEO, the late Joe Dolan who did real work for RFK, said, "a monkey could do this job. All they want is somebody to sit in the chair." Don't get me wrong. Offered the chance to be a multi-millionaire monkey, I'd take it. I have the credentials, for sure. But given the facts, a lot more than publicity about salaries is coming. At some point in time, as happens during every revolution, the many ask the few, "tell me again, what exactly is it that you do for a living?". It is then that we discover just how profo
und the differences have become and what is to be done to change it. Perhaps the capital shift from domestic ownership to foreign ownership will simply take things in hand. But I find it hard to believe that this vibrant, innovative, free, energetic and incredibly resourceful nation can't just seize this opportunity itself.
- Fernando das Neves Gomes
- Consultant, Independent
It really is a big question. I fully agree with the article but let me explore a little on my own:To talk about this meter we are, at least, judging three big questions as my concern, first social justice, second business owners justice and third average employers revenues justice.
As you can see I put one common reference in all of them "justice".
The worst scenario:
The CEO on the job, getting your xM year package, tell to the company:
1st regarding social justice: To face the new economy challenge we have to cut in expenses, we can't support no more our social academy;
2nd regarding business owners justice, this year we have to sell some company assets, we can't give dividends, we have to face with new investments stock options decrease...;
3rd regarding average employers revenues justice: This year we can't afford salaries increase, facing
less demand we have to downsize and lay off company
In this case everything it's wrong.
...
The desired scenario: 1st this year we go to build a new sports complex in the city; 2nd this year we go to distribute 40% dividends (the average by the big 50% company owner have to be bigger than xM) and 3rd this year we have a salary bonus and for the 10% company best employers we have a special offer.
Regarding first scenario everything seems wrong, regarding second scenario the CEO deserves a bonus.
- Paul T. Jackson
- consultant, Trescott Research
There is already available in proxy statements what the compensation is. It's supposed to be public knowledge, except few of the public learn of it, and few investors, apparently get upset or can do anything about the obscene compensation packages. Worst of all is the boards of directors that allow such obscene compensation.That said, there are some very large companies like Microsoft that do not have really, really large compensation (comparatively) for the top executives from what I see.
I suspect part of the problem is not the package as a ratio with normal compensation, but the process by which these obscenely paid executives try to hide that compensation from tax via charity foundations that are neither there for charity nor good deeds...and then have the audacity to ask the public to donate more for the "charity."
I've seen these and just can't tell you here how difficult it is to try and report this to IRS or the public; they don't want to hear about it apparently, although there now seems to be more motivation for IRS to go after these fraudulent "charities" or non-profit entities.
One such non-profit indicates grants available for many, but then the eligibility requirement is such that only their particular "play thing(s)" gets funded; hardly a public "charity."
I heard a minister many years ago, from the pulpit, denounce the obscene compensation of $300,000...it was directed to one of the church's members.
As a small time investor and grant writer I see such money wasted on opulence rather than public good, and that, if seen by the public, would let the public know what selfishness really is and if the boards of these giant public companies could be easily found, the public would rain down their dissatisfaction on them...the only way things will change in corporate echelons...along with compensation committees.
- Ulrich Nettesheim
- Co-founding Partner, Passages Consulting
I am not sure "moral suasion" is the right framing of the question. I might suggest a different question - does increasing transparency and visibility of the ratios help increase the ability for shareholders and boards to make better choices?Second, I was reminded of one of my favorite grad school profs Morton Deutsch at Columbia who tought us about distirbutive justice. He offered a framework that helps clarify the black box of the words we use (e.g. fairness) regarding topics such as pay. Deutsch described 3 types of fairness, equality, equity and need. Boards, Comp Committees, shareholders and CEOs themselves could untangle what is best for their specific situation. One of the best agents to advocate for the right level of pay will be CEOs themselves. It's a controversial view, but policy is a blunt instrument whereas informed individual judgement with a hefty dose of transparency goes a long way to doing the right thing.
Ulrich Nettesheim
www.passagesconsulting.com
- Guy Higgins
Two observations --- The Dodd - Frank proposed legislation assumes that everyone will respond exactly the way that the two legislators want them to. That is assumption is preposterous. People will respond in the ways that bring them satisfaction or gain. So there is almost zero likelyhood that the proposed leegislation will create anything like the Dodd-Frank desired "reform." The camera on the well generated a call for action because the TV news put the darn thing on the screen every hour or so.
- Until the shareholders realize that there are many many more people out there capable of running companies and thereby refuse to over-compensate (whatever that means) C level jobs, the current situation will remain. In fact, recall that CEO compensation began to balloon only when the CEOs could see each others' comp packages and began thinking, "I'm better than that doofus." An anecdote that shareholders need to think about -- in 1989, the US Navy made it's annual selection of officers to be promoted to One Star rank -- a big promotion. The group of selectees were addressed by Vice Admiral (3 star) Mike Boorda who told them that they should be pleased and satisfied because they were smart, had worked hard, made substantial contributions and succeeded on a wide variety of challenging jobs. But, he cautioned, they should also know that if the Navy put them all on a plane the next day and it crashed and they were all killed, the Navy would go a select another gro
up of officers "EVERY BIT AS SUCCESSFUL AND QUALIFIED AS YOU." Just because a person gets tapped to be CEO does not mean there are no better people out there.
- Jay Somasundaram
- Systems Analyst
Gigantic CEO compensation is a symptom of an underlying problem. While symptomatic relieve is sometimes useful, it may be that we are focusing on the symptom to avoid examining the underlying problem.What is the underlying problem? On that we would need to reach consensus, but I would suggest that it is tied to a number of widespread mental models such as capitalsim, money as the principal driver of human behaviour and the hero-CEO.
Moving back to the question actually posed, it is stated that the evidence that lowering executive compsensation improves employee morale and thus company performance. On the other hand, I believe there is a fair amount of evidence that signifcant income disparity is unhealthy for a society. There is also considerable evidence that at higher levels, increaseing financial reward becomes less and less of a motivator.
- Anonymous
It will achieve nothing!!!CEO's salary is open to Board, Regulators and anyone who wants to know it. Nothing is going to change if we publish it, neither the mindset of CEOs nor the fate of the people for whom the CEO is only a position to use power for self accomplishment.
- Dr. S.A. Visotsky JD, LL.M.
- Chairman, Vitech Group LLC
Actually, whatever the CEO recieves is not the business of any person who is not a shareholder, or from outside that company. If they don't vote on it, they have no right to complain about it. Example: XYZ Petroleum says we will pay our CEO 5 Million + bonus (when you hit the target we set), pay the man. If he walks out with $50 Million, so be it. If the company hit a target of $50 BILLION, who cares that the CEO takes home $50 Mil? He earned it. These things are decided at the Annual Shareholders Mtgs. of any Publicly Traded Company.Again, those who don't vote, should not comment. None of their business.
Nobody's killing dolphins here. It has nothing to do with morality, it's called "performanced based pay". Perfectly legal. If you want morality, do "pro bono" work or study philosophy, just stay off "The Street".
- Andy Kaplan
- Chief Financial Officer, DonorsChoose.org
Like most other things, a single measure rarely tells the full story. Beyond disclosing the ratio, we need beefed up shareholder rights, requiring shareholder approval of CEO compensation plans. While this will not be an overnight solution to the problem of "dumb" compensation packages, I do believe the board of directors will look closely at the voting results. Hopefully, down the road, the board will think a little more about "how this pay package will play out with the shareholders" before submitting it to a vote.- Dr. Solomon A. Morgenstern
- Chairman Emeritus, Morgenstern & Morgenstern LLP
Obvioulsy, you only want comments suggesting a "moral dilema" from the same people who always write a "Novella", stating how "perplexed" they are.A REAL Chairman or CEO of a company doing more than $1 Billion USD per year, most of us "Roseans" of Beau Soleil products, will give it to you straight, and you don't like that, do you? Philisophical debate over big business belongs in the hallowed halls, to be discussed by Professors who never got a chance to cut their teeth in the real business world, most deciding to hide in a dusty office and smoke a pipe. All theory and no practice, makes Jack a very dull boy. Keep printing how "torn" Mr. K finds himself over this dilema, while the rest of us try to find the courage to face tomorrow. Please, it's not a poetry contest, it was a simple question.
CEO's pay is determined by a vote at the ASM. Nobody outside the company has any business offering their commentary, like we saw when Rev. Jesse Jackson showed up at Goldman's ASM, just to stir trouble. ANY person who doesn't see it that simply, is probably experiencing an "internal management dilema" that has them "pondering a plethera of dynamics, previously not considered in this particular equation". You gotta love that fake NE pseudo-Intellectual talk, they always add knowing you will print those comments first, saying, "Look, he's one of us! Class of '90"
- Anonymous
Very intense public debate going on here...Nobody's killing dolphins here. It has nothing to do with morality, it's called "performanced based pay". Perfectly legal. If you want morality, do "pro bono" work or study philosophy, just stay off "The Street".
He "earned" $50 million? How does one single person alone earn $50 million? Your bleeding and robbing America and the middle-class!
These are my two cents.
- Philippe Gouamba
- Vice President of Human Resources, Skyline Windows, LLC
CEO compensation mystifies me and I am in the HR business!The fact is that companies compete to get the best and brightest CEO's they can find. It is that same competition that drives up the compensation of the CEO as it would drive up the price of any sought after commodity. A CEO is hired to attempt to steer a vessel through rough waters. In doing their job, CEO's often have to use a tried-an-true approach to problem solving and take risks as they forge forward. The problem is that if the company that a CEO works for produces poor results, does that automatically mean that the CEO did not put effort into the company?
The Dodd-Frank has good intentions but it is doomed to failure. Even though companies want to be seen as responsible and responsive, initially, CEO compensation will be tightly monitored and somewhat curtailed. My worry is that as CEO compensation "drops", competition for forward-thinking, results-producing CEO's will again drive compensation upward to the point where, in the long-run, the Dodd-Frank bill will not be effective because it amounts to trying to "shame" business into behaving by disclosing CEO remuneration. You cannot legislate competition!
- Ravindra Edirisooriya
- Senior Accounting and Finance Major, Missouri Southern State University
Professor Heskett has drawn the attention of the collective psyche to a vital question "Will CEO Compensation Publicity Bring Reform?" which could decide at least in a small way the long-term future of capitalism as we know it today. Thinking in the reverse, if Corporate America needs reform then there is something wrong with it that needs to be fixed. We have discovered in the eight years of Bush administration that free market principles cannot police or reform the ways of Corporate America by itself. (Shall we vote them Republicans back into the Congress and Senate to get more of it?) There are two other players who could fix the ways of Corporate America and they are the consumers and the government. The consumers are too feeble and disorganized at this moment and they have fallen victim to the ways of Corporate America. Consumer victimization is demonstrated by the housing foreclosure crisis, health care crisis, health insurance crisis, financial crisis, fiscal policy crisis, energy crisis (drill baby drill?), environmental crisis, transportation crisis and food crisis. By default the representatives of we the people, the government has assumed the role of reformer and policeman of the ways of Corporate America. Now the question of how to fix the ways of Corporate America is transformed into two other questions. Has the government got the right tools to measure the problem(s) and has the government got the right tools to deliver the solution(s) to the crisis(es)? Can Obama administration fix it? The short answer is "no" because of the powers of corporate special interests allowed in our constitution. Two glaring instances are the failure of campaign finance reform legislation and the recent Supreme Court decision to allow unlimited and unmonitored funds (from nowhere) to influence the political process. The legislation that passes through our political process such as Dodd-Fra
nk legislation or any other legislation to do with Corporate America is watered down in our democracy, which makes it almost impossible to achieve meaningful and sustainable changes to the ways of Corporate America.
Looking at Professor Heskett's question from a financial point of view, the market for CEOs decides the pay of CEOs and "moral suasion" is a far cry. It is somewhat demonstrated by the fact that Wall Street can increasingly reward itself in a down (last) year or an up (this) year.
- Henry Maigurira
- Executive Secretary, Pachi Develpment Foundation
The global financial crisis of this decade was largely attributed to inadequate transparency mechanisms in control of financial markets. Establishing standards, and principled approach towards a new revolutionary way on control and monitoring of CEO compensation is one variable which signified a move towards financial markets regulation in the interest of global financial stability in the banking industry and stock market. publicity of CEO compensation is a culmination of a process driven reporting and implementation of accounting and risk management standards of organizations. Publicity permeates a culture of a systematic accountability instances where there is unjust beneficence as a factor that contributes to rigidity in stock markets. Publicity is good as it sets potential principles where general laws will stem from in the long run that work in the interest of stable financial systems as of wall street.- Andy Robin
- Retired, None
There will be no legislation affecting CEO pay, especially after the Citizens United ruling by the Supreme Court. Corporate money directed for or against legislative candidates by overpaid CEOs will ensure that no legislation will be forthcoming that has any impact on CEO pay.- Rudolph Houck
- Partner, Eaton & Van Winkle
The pay disparity reflects the overall division of wealth in the US: the top 20% owns 80% of the wealth. The public (both Republicans and Democrats) prefers the far less concentrated Swedish distribution, but certainly cannot agree on WHY the US wealth is so concentrated, whether it is a good idea to tinker with the distribution and - if tinkering is a good idea - how to do so. I have a hard time imagining that the shareholding public will do ANYTHING to change the distribution. As to European salaries, some argue that Mercedes bought Chrysler largely to get Stuttgart executive salaries up towards the US levels. That part of the deal worked as hoped for.- Bing Sherrill
- HBS '62, Retired
When the focus was on teacher pay being related to the performance of their students, the teachers complained that the data should not be made public.When the school principals were to be paid or retained based upon the progress of the children in their school, the principals complained that the data should not be made public.
When the hospitals were required to release data on infections and errors, the hospitals complained that the data would confuse the public.
Now the rules say that organizations must make public how well they are taking care of all their employee contributors, and many of the above comments say that this is private data, and will confuse the public.
How did you feel about publicizing the other data?
- Merry
- Director of Marketing
As long as the SEC is limp enough to let the tanned piece of leather at Countrywide off the hook with a fine that equalled his bonus, corporate gangsters will lope off with shareholder's profits. He just took one for 'The Family'. The Boards who dole out shareholder's funds with such disregard are also common gangsters. No one, and I mean no one really earns an $80 million dollar bonus at a public company that is run on shareholders funds....much less quasi government entities such as the MAC Family, Freddie, Ginnie and all their little tentacles. It is 'fashionably ludicrous to be crass, arrogant and purely greedy. There is nothing noble about Paulson, Gramm or Dick Fuld. What is evident is 'connections'. Shareholders are the minute, invisible millions of little people who have given them paltry amounts of money that just happens to add up to their working capital.If an individual creates that wealth from their own funds, then good for them and it is fine with me. But while the trend of outrageous salaries/bonuses goes on, my money is not going to Wall Street. Henry Paulson was squarely involved in the development of our current disaster. Legislators were squarely involved in the development of our current woes. Where is the focus on these perpetrators? Where are the consequences. You are more likely to get audited by the IRS if you are a hairdresser than a member of our obese government...after all, they are members of the club.
All investors can do is vote with their feet. And you can't even do that if you've got a 401k...most don't even have a money market in which to park your funds. Why? Because that's the way Wall Street wrote the legislation...with our elected Legislators, who have not and do not act on behalf of the investors. They don't breathe the same air. They don't eat the same food. They are not the hard-working investor, who saves and scrapes by in order to have some security in their retirement years, because Social Security has been IOU'd to death by said Legislators. We are a country led with arrogance without ethics and heavy with greed.
- Anonymous
Want to see the CEO's pay? Fine, but first I would like to see the compensation of Chris Dodd and Barney Frank. Not just a total, but a line item breakdown of where each dollar of income came from.Until that happens, the compensation should only concern the shareholders and the board of directors. It is the business of no one else.
- Anonymous
All the company has to do is put a cap on the CEO salary, incentive bonus and stock awards. I recommend a gross salary max. of $500,000 per year, 20% of gross salary incentive max. if the PMOS is over 10% for any given year and 1,000 shares max. of common stock per year (again contingent on PMOS). If no PMOS then no merit increase, no bonus, no stock award. Also, no "golden parachute". You get fired, you get nothing.- Dr. S.A. Visotsky JD, LL.M.
- Chairman, Vitech Group LLC
Lots of people "earn" $50 Mil USD. If a CEO is working 18 hrs a day, (like ours does), 7 days a week, (like ours does), marriage hanging on by a thread, might see his kids 2 or 3 times a year when they are home from school, that's a CEO.In one word, DRIVEN.
Will not let anything or anyone hold him back from his goal: what ever I set his goal to be. That's the job. The weak need not apply, the confused, need not wonder.
Now, what does that have to do with "bleeding the middle class? The CEO should be paid in relation to what the company earns. Then we can justify that he was part of the equation, therefore deserving of a good pay package. That is exactly the problem here. You make it the middle class's business when it is not. When we say "investors" here, we don't mean daytrading amateurs who divide their time between online poker sites and some $4.99 per trade junk site, we mean at least $1 Mil USD in market exposure. That is an investor, allbeit a very green one with only a $1 Mil on today's market. You are the one's winding up the middle class saying, "look at what they make, it's not fair!", start hating sports. A large majority of athletes can't even write a book report at 7th grade level. Don't hate the player, hate the game.
- Blake Tzmku, CPA
- Professor, Organization Behavior & Economics
great debate going on here. I thought I would join the discussion...What does everyone think about a "cap-and-trade" model for CEO compensation? Like the one used in Green Energy?
- Yedendra G. Chouksey
- Professor, International School of Business & Media, India
What is open to public glare does restraint proclivity for "insanely generous" self-rewards. As such, irrespective of whether publication of the CEO's compensation will be taken notice of by the shareholders or not, the transparency will serve as a moral brake on the excessive avarice of the top management.The hurdle of measurement can be reduced by defining various commonly used components of executive compensation and putting the rest separately. A more equitable ratio would be comparing the CEO pay with that of the lowest paid employee of the organization.
Even in the most pessimistic scenario the publicity will be a no-loss-no-profit game. So, why not try it and hope for some better discipline in top executive reward system?
- Stephen Basikoti FCCA
- Accountant
There are many things that affect compensation, on one hand. On the other hand, compensation of one person in relation to all others in a firm is only one of the many factors that affect corporate performance.Compensation is affected by the tax regime, profile of CEO, risk, values of the board, desperation of board to acquire and retain a CEO with a particular aura around him. Celebrity CEOs will always attract celebrity compensation, however transparent the system is. The same can be said of all other factors in relation to transparency of compensation. Additionally, there is the influence of the CEO to consider. CEO have tremendous influence on what their compensation will be. They are like a man by a pool who likes to use his big spoon to stir the pool. Each time the mud settles and the water is clear he plunges in his spoon and stirs. [Consider the comments made by Prof. Heskett that amounts shown in the detailed explanations of the top five executive pay packages required recently for public companies can be highly misleading.] Unless the spoon is taken away the CEO fellow will continue to stir the pool at convenient moments. Of course, it is impossible to take away the CEO's
influence on determining compensation for it can also take away the firm's ability to attract desired CEO.
Economy, talent, labor relations, competition and, of course, compensation all affect corporate performance. Moreover, all these factors are dynamic. For instance, not just the current relative difference in compensation between the top person and others is critical but also are the potential of their relationship to change in future as well as how the pay of those at certain level compare from company to company. If persons doing similar work in similar firms have huge differences in compensation and the top person in the company where the pay for others is low is paid substantially more than his counterpart in the other firm, those in his firm will feel treated unfairly and will not be as productive. This is a simplified representation of the dynamism of the impact of the factors that impact performance. Each of the other factors involves similar interconnected impact, which renders transparency alone as a factor of limited impact.
Indeed, more is required to bring true reform than mere publicity of CEO compensation.
- Fatmanur Erdogan
- www.fatmanurerdogan.com
I concur with Zack Allen.On the other hand, highly-paid CEO's and management boards tend to have heightened self esteem, and an acquired situational narcissism, which in turn drives them toward attaining short term profits and stakeholder admiration.
When the pay gap widens too much, one needs to consider its effects on the organization as a whole.
- George Roets
- sr. consultant, GAR Organizational Solutions
The answer is no. Those who make the decisions are well aware of the compensation packages involved. The demonization of CEO's over the last two years and the highlighting of the inequality of compensation has not served to change the CEO compensation practices. In a free society we will continue to have decisions made by those who can. Government currently is attempting to rein in some of those decision makers.....and not others. Compensation decisions made by a plumber for his helper and by a football team owner for his quarterback are ignored. Why is that? The one example pales in the face of multimillion dollar cmpensation packages, while the other does not. what about the legal profession? Some class action lawyers have "compensation packages" that any CEO would be jealous of. So, whats the fuss about CEO compensation? Another thought i continue to have is....hasthe anti-CEO compensation environment raised the overall standard of living for the rest of us? I think not.
- Phil Clark
- Clark & Associates
I rarely offer two opinions to this blog... but the lack of response on this subject is deafening. Thirty-nine responses may be the least I have ever seen on a James Heskett "What do you think". I really do feel this is one of those subjects that have been around forever in one form or another and still no right or wrong answer. This should make Jim's summary much quicker this month!- Anonymous
No, it won't bring reform. There is total disregard for the greater good. Greed is far to inbred in our corporate cultures. Business schools have bred managers who believe cost-cutting is the only path to profitability. They don't produce critical thinkers, and judging from the lack of change since the fall out, will continue to not breed critical thinkers. Our business culture is ruined for good. It's far too corrupt to change.The only thing that has potential to change this is government regulation and no one is going to let the current administration do that.
As they used to say, "they all want to have their cake and eat it, too".
- John Wilson
- Group Commander, NIFRS
There's considerable evidence that the CEO's of quoted companies who earn the most - relative to their staff - deliver poorer than average performance during their tenure: may as well embarass them ( though they probabaly have no shame! ).- MP Campbell
- Actuary
I think we had better check our assumptions here.The likely upshot of even more publicizing of CEO compensation is a further arms race in CEO compensation.
Shame is not going to be an operative factor -- come on, has any behavior in the past 20 years made anyone think that one can shame the companies where the comp seems way out of whack? If they are the type of companies that could be shamed (or execs that could be shamed), they would already have changed their behavior.
I'm sorry I don't have the link at hand, but recently there was a study in what happened when UC salaries/comp were publicized -- it turns out those below the median get annoyed and those above don't feel all that much better. Likewise, CEOs "underpaid" will use public info to try to negotiate higher packages, and those above are unlikely to feel pressure to lower their sights.
It will take Board discipline to keep a lid on this, and given most Board members are from executive ranks themselves, my hope is not high that much will change. What could really help is if institutional investors felt the need to reign in this behavior - and I believe some are interested in this. They didn't require Dodd-Frank to get the necessary info, though.
- Anonymous
I doubt the legislation will have much effect and regret that it is needed. However, common sense, personal humility and shame don't seem to be doing enough. Something is needed and I would suggest that the tone and teaching at HBS is one place to start. Most evidence from the social sciences suggest that more money after a certain point causes little positive outcome, either in terms of motivation or personal satisfaction. However, it is powerful as a tool of competition--but totally the wrong type of competition, for ego and status rarely attached to performance. Moreover the incredible increase in economic disparity has very negative social, cultural and organizational consequences in this country.- Steve
- Product Director
Cullinane's right about the shareholders, even those with minuscule amounts -- you have to hold the BOD's and top management's feet to the fire. (Preferably a real fire, redolent of brimstone.)- Anonymous
Q: "Will CEO Compensation Publicity Bring Reform?"A: It never did in the past, so why should this time be any different? Shame will not have any effect on the shameless. If you don't like how people in the private sector are compensated, take it back... by taxing them.
- Anonymous
The proper role for government here is to assure disclosure. There is no other valid function of government on this topic. The idea of comparing CEO to rank & file compensation is just socialist BS. Having the government at all involved in setting CEO pay, or rank and file pay, is also socialist BS. The comparison isn't even apples and oranges... it's apples and cell phones. What matters to the shareholders is CEO performance and the market for CEO pay on the one hand, and rank and file performance and the market for rank and file pay. If the company is overpaying, it should cut it, whether it's CEO or rank and file pay. If the Company is not getting performance, then it should make the necessary changes, pay more / change people / change organization / etc. to fix the performance issue. Those issues are way too complex for any government agency to do anything but muck up. (Remember Adam Smith told us that the marketknows more than any finite group of individuals can know, and Goedel confirmed it.)
If the government insists that companies do things which reduce their market value, the market will compensate by reallocating capital, moving the company, etc. And no finite group of individuals can know all the ways the market responds, including brilliant HBS professors like Heskett, or some of the somewhat less astute who have commented above.
HBS MBA of late 70's
- Daniel
- Roberts, www.RAASConsulting.com
Reporting of Executive Compensation is a great idea, and i snot new, except perhaps in the United States. It is mandatory in the UK, India, New Zealand and a number of other countries. Of course, so is a range of business information in the form of annual reports and reports to regulators and exchanges.The pity is not the requirement, but the half-way step that the SEC is taking. Currently the SEC has mandated the provision of regular filings (10K, 10Q, 20F) in the XBRL format - to enable the rapid consumption of reported information at the data element level. Soon every filer will be required to provide individually tagged data elements for all numeric values in their quarterly and annual filing.
Yet the SEC's proposed rule to meet the Dodd-Frank legislation does not require the CEO compensation (or any other compensation for that matter) to be provided in the same data format as the rest of the filing. This means that analysts and consumers of the information will still need to manually find this informaiton and copy/paste or re-key the information.
The SEC should take the extra step and require the information to be provided in XBRL (or what the SEC calls "interactive data").
- Felix
- director, Food and beverage
I am in support of higher transparency as most people with alignment to corporate ethics and the state of the current world economy as a result of the lack thereof. However I believe this disclosure should be indirect because of the negative implications in regard to personal security and undesirable scrutiny into the lifestyle of executives.In the end, the balance must be between the individual's right to privacy and transparency (and the equity it creates). One has to be guided not to become over zealous and fall prey to completely level the playing field in apparent disparities.
- Carlos Galvez
- Vice President, Lincoln International
An underlying cause of the disparity in income between the compensation of CEOs and that of line employees is just economies of scale. While the difference in compensation may seem outrageous when evaluated out of context, the fact is that the CEO of a large corporation naturally has much more leverage and his decisions will impact vast resources. Some may opine that paying the CEO of Goldman Sachs $50 million is too much, but he oversees over $1 trillion in assets. If his decisions improve Goldman's return on assets by only 0.005%, he has already paid for himself.It may be difficult (and even undesirable) to accept a society with a large degree of inequality, but the best way of achieving that outcome is to reduce the gap in productivity between top management and line employees. Hoping that shareholders, boards of directors or CEOs themselves will act against their own self interest is unlikely to work in the long term.
- Edward Hare
- Retired Director...Strategy and Planning, Fortune 250 Manufacturer
The question..."will moral suasion SUCH AS MEASURES AS THE FRANK-DODD BILL" affect CEO compensation?"Not a chance. Strikes me as window dressing by a couple politicians (who aren't exactly paragons of virtue) designed to show voters they're acting in the public interest. What we'll get is just another metric of dubious value to argue about.
Overly compensated CEO's and their lap dog Boards remain clueless. MONEY is the only metric that matters when all is said and done. The more a CEO gets the more it tells them they're "better" than their peers. It's the only scorecard they know.....and embrace.
We need another system of values....not another metric around the same God to worship....money. We need to come to grips with how much is "enough", not how much more can we get or rationalize. Self-restraint is not a bad thing.
Why can't we devise metrics around how many jobs are created? How many new plants are opened? How many decripit facilities are re-conditioned or cleaned up so they don't wind up a public expense?
I'd like to think that with a little imagination we'd be able to devise measures that are far more meaningful to assessing the true "worth" of a CEO than simply how much money he/she is to be paid releative to an average employee.
The second question...."Does it matter?" If by "it" one means a resetting of what's important, what we might reasonably expect, and what we should be held accountable for well beyond the almighty dollar then the obvious answer is....it most surely does.
- Rebekah
- Student
I am not sure CEO compensation publicity will bring reform, but I think implementing this is a good idea from a corporate governance and ethics point. For one reason, a few countries within Europe, especially the Scandinavian are more open about this. And it would be a good base to compare compensation structures across geographies and the type of organizations (public and private).Recently, I came across some interesting statistics on the earnings of CEOs, "The top 1130 World CEO's earn $2.24 Trillion each year", which is enormous! Incase of an economic difficulty, it would be better to reduce on the CEO compensation, rather than putting the jobs of millions of middle income workers at risk!
- Dr. S.A. Visotsky JD, LL.M.oec
- Chairman, Vitech Group LLC
How does a CEO, "lope off" with shareholders money, when he gets $50 Mil. USD? If a firm does $50 Bil. USD, that is an insult, not a pay package. The shareholders vote on the pay of the CEO, they approve of his pay package.Here's a tip son, if you buy stock because of the "dividend", get out of the market quick. You buy stock for share price and voting rights, not to earn an extra $1500 bucks, which is a pair of shoes, or a good lunch here. Dividends mean nothing, it's like table scraps, by comparison. Keep beleiving that shareholders own the company, that's what happens when you are "satisfied" with an MBA, it takes a real degree to swim with the sharks.