Executive compensation is something stockholders really don’t care about when a company is profitable and stock values are going up and paying dividends. And right now, the Dow Jones Industrial Average is seesawing around a record high 16,000 mark. But there are times when people do wonder what’s going on. Last year, Bloomberg Businessweek compared executive compensation to the average workers’ pay.
The highest ratio was at the J.C. Penney Co., where the CEO’s annual compensation was $53 million. His workers’ pay, on average, was $29,700 — a ratio of 1,795-to-1. He was fired shortly thereafter because he had spent too much money on marketing and made too many changes. The company was improving and doing well; his compensation wasn’t what cost him his job.
“Of course, when things are going downhill, boards of directors start looking at trustworthiness, ethics, accountability and performance,” says Robert Bjorklund,
Ph.D., a professor in the Management Department of the School of Business at Woodbury University.
Smart Business spoke with Bjorklund, who is studying CEO compensation issues in top American corporations, about executive pay.
What message does sky-high executive compensation send to employees?
Do most workers care how much money Oracle Corp. CEO Larry Ellison makes? Not really.
What workers care about is internal equity; how their pay compares to other workers. If the person who’s sitting in the next office, doing the same thing, is making 20 percent more, that’s upsetting. But as far as the CEO, who is levels above rank-and-file workers, as long as he or she is making the company work, employees don’t really care. Employees have a stake, if not a say, in executive compensation, but they really have a stake in executive performance.
Should pegging compensation directly to performance be a given?
Many question whether CEOs should get a bonus when company performance is subpar. And that’s when you have to come to grips with the definition of performance. What makes a company successful? Must it involve something that has long-term impact? If you’re keeping a scorecard on where the company is going after the CEO departs, has the company been ramping up for the future? If so, that’s a good thing. But if the executive is getting paid for driving the stock price up, that can be disastrous. Assuming a CEO is paid in part by stock options, that means he or she is doing whatever he or she can to drive up that
price. That might put the company in more debt to increase an equity ratio of some sort. But if the stock rises and the CEO cashes out, that may not be good for the company, long term.
It would be better if we could find a way to normalize the value of a company — not in terms of what its cap rate is right now, but where its cap rate is going and the contributions the company is making.
What has been the effect of corporate governance mandates like Sarbanes-Oxley and Dodd-Frank?
Dodd-Frank hasn’t been all that effective. It certainly hasn’t changed executive compensation policies. There is an issue of scarcity, of course. There are only so many people qualified to run a Fortune 1,000 company, which drives up their value. For CEOs whose companies are doing well, the board’s personnel or executive committee is apt to think, ‘Our CEO is making only $30 million. Let’s give that person anything he or she wants to stay, because we like the job he or she is doing.’ That also applies when the CEO has no intention of leaving but wants a sweeter deal.
Is CEO compensation out of control? Certainly, if the issue is that there’s no overarching system to govern executive pay. But in the long run, the law of supply
and demand applies. If somebody’s doing a poor job, that person won’t last. It’s also likely that the next person will receive more money than his or her predecessor. Non-board members don’t feel they’re empowered to change the situation. They tend to look the other way — as long as the company is delivering a good product or service at a reasonable price, which is what everyone wants. ●