by Elliot Clark
This is a signature issue among politicians and a classic example of corporate greed. I love people who cannot pass a budget in any year decrying the earnings of the worldâs most accomplished business people. However, it is an issue of some merit and one that HR and board compensation committees had better grapple with soon. After all, the best solution to a business problem is a business solution, not a legislated solution that is likely to backfire.
According to an AFL-CIO report, the average ratio of CEO compensation to average worker compensation is 331:1. That may sound outrageous, but that CEO may have as much if more impact on company performance than 331 average workers. And yet, it still does not feel right. Moral ambiguity aside, the biggest problem I have with CEO compensation is the potential for that 331X impact to be mostly negative. Why the heck do these men and women make so much money when the results are not there? That is the crux of the problem.
There are plenty of arguments about the impact of a great CEO. Many people single out Larry Merlo at CVS as a great CEO, someone I actually know and respect very much. We featured him in our Corporate Responsibility Magazine for the ban on tobacco products at CVS. We did a joint speaking appearance, and so for me, he is not a name without a personality around which to decry a cause. He is a real human being who had to work very hard and be very smart to become the CEO he is today. When he became CEO at CVS in 2011, the companyâs stock was trading at about $32 per share. Today it is about $97 per share. Thatâs a 200 percent increase in company value for the shareholders, employee option holders, etc. Arguably, in the teeth of a recession, this guy has been the poster boy for the high-impact CEO.
I think at the other end of the spectrum is a truly troubling example. In the press this week, the media have decried the compensation of CEO, Paul Kibsgaard. Stock is down 18 percent this year, they have cut 25,000 workers, revenue was off 27 percent, and profitability was off 41 percent as reported by CNN Money. His defenders can point to the fall of oil prices (Schlumberger is an energy drilling and services company), and the fall in oil is certainly related to the fall of the stock, but Kibsgaard took home increases in his cash compensation (a 12 percent increase to $5.2M) and increases in his stock. His overall compensation dropped due to the decline of his pension fund. Boo hoo.
There is the rub: he is not responsible for the decline in global energy prices, but why isnât he along for the ride along with the other workers and his shareholders? He is luckier than 25,000 of his fellow employees. He kept his job, but how did his compensation go up!?
I was once an officer in a publicly traded company, Kenexa (now IBM Kenexa). We were well compensated for executives in a company our size, but only 20 percent or less of our compensation came in the form of salary, and if you added in stock incentives, it was less than 10 percent. If the company did not perform, we all took a hit together with our shareholders and our employees.
Board compensation committees need to put in formulas offering high rewards for performance and forfeited compensation for failure. Why donât more companies have a 20 percent/80 percent compensation formula for the CEOs and top officers of all public and private companies?
I think that the overall compensation is one issue. Should someone make 331X the average worker? I am not sure if that is proper, but I think if that person was putting a lot of that at risk for making big impact on the company, I would feel much better about it.
If CEO compensation is not addressed soon, we may have some regulatory fiasco brewing that will drive companies into some other form of equally bad behavior. CHROs and compensation committees need to get together and fix this problem now.