5 Reasons We Can’t Fix Executive Compensation
Executive compensation, especially at larger companies, continues to soar ever upward. Headlines in local newspapers and websites around the US are reporting record years, once again. While there are valid arguments for many huge CEO pay packages, there are at least as many that defy explanation. Why can’t we get our arms around this issue?
No one wants to admit they have below-average executives. Boards don’t want to tell shareholders that the goal is to have an executive team designed to perform below the middle of the market. Shareholders don’t want to invest in a company with a below-average executive team. Executives don’t want to be told (or admit) that they are “less than.”
Shame is not an effective deterrent. Our country is currently built on crowing about how much money you have. People at the top know that there is always someone who makes more. Many middle and lower-level employees celebrate and aspire to be like the high paid executives at their employer.
We have allowed a system to be built that cannot be sustained. In the early 1990s, executive pay began its rapid movement from cash and perquisites to a heavy dose of equity. In many industries equity was poured over every employee with the goal being a singularly aligned workforce. As executive pay has increased it has eaten more and more of the available equity (shareholders frown on 100% dilution). This means there is less and less available for the rank and file. More importantly, equity (while amazing) is a limited commodity. The current growth cannot be sustained without shareholders accepting significantly more dilution AND employee getting far less equity. My guess is that the current approach has 5-10 more years before it begins to cannibalize executive pay.
Executives are increasingly portable. Not so long ago most executives stayed in one industry and often at one or two companies for their entire career. The lack of movement worked to inhibit outsized pay increases. It also served to slow the need for expensive outside hires to replace the people who left. This is just like free agency wildly increased the pay of athletes. This will not, and should not, go away, but its impact cannot be underestimated.
The stock market has been redesigned to grow for longer periods and fall for shorter, albeit more dramatic, periods. This means that stock-based compensation grows more aggressively and more predictably than it did twenty or forty years ago. When crashes occur the reset period is short and the low prices provide for stacking even more equity onto the pile.
So, what should we do? All of our prior efforts have been the equivalent of pouring gasoline on a fire. Perhaps it is time to reassess whether the “scorecard” of executive pay disclosure is doing more than simply providing the foundation for next year’s big increases. Maybe a little less data will result in a little more control. I’d love the hear the thoughts of compensation professionals, whether or not they are focused on executive pay.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is also a leading expert on equity compensation issues and has written several industry resources including the one-of-a-kind Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.
