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Who Is To Blame For Outrageous Executive Pay? One Less Barbie Dream House
Won't Hurt Anyone

By Frank Glassner CEO, Compensation Design Group

March 6, 2002 - The following document is the opinion of Frank Glassner:

The issue of skyrocketing executive pay and mass corporate layoffs continues to be played out as a classic case of David and Goliath. Today's news is filled with stories of the many wealthy CEOs who grab their multi-millions while their employees hit the unemployment lines. But is it really as simple as David and Goliath?

There's no doubt that some CEOs can be greedy and unethical, but just as there are plenty of examples of CEOs who take the money and run, there are even more examples of mediocre CEOs who skip along, collecting exorbitant pay that's out of line with their performance. When you look closely at the real picture, it's much more complex than David and Goliath.

As fingers point and blame flies around, just who is responsible for all this? Is it the CEOs themselves who happily pocket millions while their employees scramble for chump change? Is it the Compensation Committees who recommend outrageous executive compensation for company executives? Is it Boards of Directors who approve those pay packages? I say no. Look around you to find the responsible parties.

I believe it's a combination of outside sources: institutional investors, Congress, corporate governance activists and the media. Companies are under enormous external pressures to look toward shareholder value. It starts with the powerful institutional shareholders who have avowed that a corporation's main purpose and management's sole charge is to maximize shareholder returns and profits. While that sounds like a perfectly reasonable directive, it has put too much emphasis on short-term quantitative results rather than the long-term health of the company.

Management feels pressed to make quarterly and annual profits and the current stock price the center of their universe. The fervor for instant profitability does not permit management the time it needs to handle all the other important issues that are key in an organization.

In addition to the pressures from institutional investors, companies are being pressured by Congress. In a strange twist of fate, the legislation passed by Congress to deal with the dissension regarding excessive executive compensation is the very reason why executive pay has risen so rapidly. Provisions of the recent tax bills attached the deductibility of executive compensation to a pay for performance standard. Of course, more often than not, that standard is short-term profitability and stock performance.

After that legislation was passed, we began to see more incentive and equity-based compensation for top executives. Not that long ago, the average executive compensation mix was two-thirds salary and one-third incentives. Today, it's completely opposite with two-thirds in profit-based bonuses, stock options and other equity-based pay and one third in salary. When stock prices began to soar, so did the pay packages of our country's top CEOs.

So you have institutional investors breathing down the necks of CEOs, and you have Congress mandating legislation. When you add into the equation the eagle eye of corporate governance activists and the omnipresent role of the media, management feels that it has no other alternative than to deliver short-term profitability. Hence, the issue of skyrocketing executive pay.

As a long-time advocate of pay for performance, I still believe that this form of compensation is the right approach for executive compensation. However, if you look at the stock prices of some companies and compare the pay packages of their CEOs, there is not an accurate match of pay for performance. Too many non performing CEOs at the helm of companies that have non performing stocks, are getting pay packages that don't correlate with reality.

To help restore balance of stockholders' interest, corporations must correct their ambitious need to push short-term stock prices. And everyone else must stop making management the scapegoat for the pressures applied by powerful institutional shareholders and requirements of federal legislation.

As for management: quit playing the role of an ostrich and get your head out of the sand. Take a leadership role in sharing your mission with employees and be more sensitive to the hardships you are asking your employees to endure. I don't suggest that any CEOs follow in the PR prank footsteps of Lee Iacocca by taking $1 in annual salary, but some type of sacrifice in today's environment is a must. I'm happy to see that many CEOs have already reduced their pay or bypassed their annual bonus voluntarily. One less Barbie Dream House isn't going to hurt anyone.

Management also must restore the relationship between wages and profitability by sharing the wealth through all levels of the organization. If the rank-and-file has to make financial sacrifices, so should the company management. In turn, when the company experiences increased profitability, all levels of the organization should share the wealth in one way or another.

Responsibility is a two-way street. Not only should companies help their employees navigate the stormy course by offering training to update their skills, but the employees themselves need to take responsibility for their future by adding to their skills set and looking at ways to improve their marketability.

As we begin to see proxies in the coming months, we will no doubt see many examples of pay for performance mockery. But remember, if we continue to pressure companies to focus on the short-term gain, those skyrocketing salaries will only continue to rise. Instead, we must ensure that companies concentrate on long-term profitability and allow them to fix their problems internally, rather than create knee-jerk fixes when bowing to external pressures.

Frank Glassner, a 26+ year veteran of executive compensation, is the CEO of Compensation Design Group. Headquartered in New York, with offices in Chicago and San Francisco, the Compensation Design Group is an internationally recognized firm that focuses on delivering cost effective and customized compensation, benefits and human resources programs.

Frank Glassner can be reached at 212/813-1212 or fglassner@cdgworldwide.com. CDG Website: www.cdgworldwide.com.

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