Capping CEO Pay – What It Means for All of Us…

salary-cap1

The cause célèbre today is CEO pay and by extension, overall pay transparency, performance-based pay and letting a government entity manage what used to be a free-market concern.  While on the surface, it seems to be a good idea – less hidden pay, less excess, more connection to performance, more oversight – I can see why it makes sense to some.

But from my point of view these are well-intentioned ideas that will just cause more problems in the future – and require increased legislation that will cause more problems that will lead to more legislation, well, you get the idea.

One of the key elements of any incentive and reward activity is to look for unintended consequences.  In other words, what will increased transparency, capping CEO pay and a greater connection to performance mean in the real world?  How will these ideas manifest themselves if (and when?) they go into effect.

Well, we have some history to look to for guidance and I’ll take a stab at some of the possible outcomes I can foresee.

1.  Capping CEO pay

This isn’t a new concept.  In 1993, then President Bill Clinton signed a law restricting the tax deductibility of executive pay to $1,000,000 effectively giving those in that stratospheric pay range a huge incentive to find other means of compensation.  Enter the creative mind of the financial world.  People were given more perks that got around the cap – giving them bonuses in stock when they hit certain goals.  This is where stock options really hit their stride – and, thanks to the bull stock market of the 1990s, made everybody far wealthier than they would have been using the old pay structure.  So, the last time the government got involved in CEO pay, we got fabulously wealthy CEOs, and now we don’t like it.  See what I mean about unintended consequences?

2.  Tying pay to performance

See #1 – we tried that and we didn’t like the outcome.  The problem is that there will be few people who will agree on what performance metric to use.  As an example, If we use share price (which should benefit the shareholder) we get shorter-term management and a company that may do well for a while in a given market environment – but will tank when the world changes (can anyone say financial industry crisis?.).  Should we compare performance against historical company performance (absolute) or against the market and the industry (relative) performance?  Either is a good measure, but what is best?  Using stock prices as a proxy for performance doesn’t work.  Too many people, internally and externally have an impact on the stock price.  Warren Buffet is fond of saying he doesn’t buy stocks, he buys companies.  He does that because a stock is a representative of a company- but an imperfect one.  What would the best metric be?

3.  Increase pay transparency

Talk about unintended consequences.  One of the reasons cited for the huge salaries and pay packages available to top executives is in fact greater transparency caused by the disclosure requirements in Sarbanes-Oxely.  Congress enacted the Sarbanes-Oxley Act of 2002 in response to a spate of highly publicized business failures and corporate improprieties.  The issue they said was a lack of oversight and transparency.  I don’t want another Enron and can see why more transparency was needed but, some of the requirements of SOX may be what is driving CEO pay issues.  Specifically, once I can see what others get paid – that’s what I want.  The highest salary now becomes the minimum salary and I want more than the minimum.  While this may not be a big issue for rank and file workers – CEOs are a unique breed and their egos probably won’t allow them to be number 3 on any list.

4.  Government involvement in market-driven issues

There are few places the government does a better job than the private sector.  With all its faults and with all the news you hear… the free market is still a pretty good place to test effectiveness and efficiency of an idea, process, or product.  I get that we need some one to make sure we don’t let the market control and manage everything – but by and large the market does pretty well.

I just don’t like the government getting their nose in the tent.  It won’t be long before we see the definition of “exceptional assistance” go from taking bailout money to having greater than 80% of your business come from government contracts (I can see the argument on CSPAN happening) – ’cause if 80% of your business is coming from the government – isn’t that exceptional assistance?  While I’m not too high on our lawmakers IQ when it comes to the market – I do know their olfactory senses work wonderfully well when the scent of money is in the air.

So what should you in the HR world worry about?

How ’bout this stuff…

  • Once the CEO has a cap – expect others with larger than “average” salaries to be targeted.  Sales, VPs, etc.
  • The government will control your compensation plans – everyone will be on the same playing field and true talent will go “free-agent” because you can’t meet their requirements within a corporate environment.  Why not be a contractor and get twice as much money?
  • If you deal with government contracts, expect to see more and more oversight into your total pay practices – not just those that deal with the specific contracts.
  • Pay transparency will start to trickle down – and everyone will see what everyone makes – and will have input into how much a job is worth – regardless of reality – the crowd will rule – and salaries will start to cluster around an average – an average that is not representative of the job or the market – but of what most employees think it is worth.

I, for one, am not looking forward to this stuff…

FOT Background Check

Paul Hebert
Paul Hebert is the Vice President of Solution Design at Symbolist. Paul’s mission is to humanize the business relationships needed to drive greater employee, channel and customer loyalty. His is dedicated to creating true emotional connections often overlooked in our automated, tech-enabled world. Paul is a recognized authority on incentives and performance motivation. Want to know what’s going to motivate your people to perform at their best and impact the bottom line? Want to know whether your service award program really means anything at all? And are there psychological principles that drive your employees’ behavior? Paul’s your guy… unless you fervently bow down to Maslow.

11 Comments

  1. Juho says:

    I could be wrong, but wasn’t the suggestion mostly directed at companies getting bailout money, to control that it doesn’t just get siphoned into the hands responsible for creating the situation?

    Reply
  2. Tim Tolan says:

    Paul – I agree with you – I too, don’t like government getting their “nose in the tent”. Having said that several CEO’s that took US taxpayer money (HUGE CHUNKS) after coming to Washington with “hat in hand” were paid huge bonuses for very (lousy) sub-par performance. If their Board of Directors were doing their job – this would be a non conversation. CEO’s should be compensated for “moving the needle” by growing profits and increasing shareholder value. To execute a poor business plan, tank the company’s stock price, drain cash reserves only to beg for OUR hard-earned money just to keep the company afloat should be grounds for termination. Sorry! I am a huge fan of “pay for performance”. Many of these CEO’s deserve NO bonus at all. NONE NADA. The speed of the leader is the speed of the pack. That’s the way it should work without government intervention. OK – I’m done now…

    Reply
  3. Paul Hebert says:

    Juho – you are correct in that TODAY the cap is on CEOs who took bailout money. But knowing lawmakers as I think I do – it’s not unlikely that they can redefine what “exceptional assistance” means. My concern isn’t today – it’s tomorrow’s interpretation.
    Tim… You bring up a great point – the Board is more complicit in this issue than the press has let on. Studies have shown that the more the Board is paid them more the CEO gets paid – they ultimately own the compensation issue for CEOs.
    My other point was that the metric for success if pretty squishy – stock price is a bad proxy for performance in today’s day-trader, short-term world.
    Bottom line – regardless of whether a CEO was good, bad, stupid, or clueless – the Government has no business (pun intended) determining what the market should bear for a public company. Now – once Nationalized – that’s a different story – and a different argument.

    Reply
  4. Paul – I agree with your basic premise that the free market should govern itself. Companies should choose how and how much to compensate their CEOs, executives, and every day employees.
    I also think that a cap on CEO pay for companies getting a bailout is more than fair. If we really cared about a free market, we’d let the companies go down hard anyways.
    What I can’t get onboard with, though, is the slippery slope argument… “First CEO’s of bailout companies, then every company! First CEO’s, then other executives, too!”
    Let’s be realistic here. It’s tough enough to get even the most palatable of bills pushed through congress. One thing at a time…

    Reply
  5. Paul Hebert says:

    I also agree we should have let the market take care of itself… it may have been more painful – but for a much, much shorter period of time.
    As far as getting a palatable bill through Congress we just pushed through a 1,000 page, $1 trillion bill that NOT ONE OF OUR REPRESENTATIVES IN WASHINGTON COULD POSSIBLY READ before they were required to vote on it – don’t tell me we can’t get legislation (good or bad) through quickly.
    I don’t have an issue with the government capping pay for companies they “own.” I am confident though, that given enough public outcry, the politicians can look into any business and make a case for capping pay… they’ve already put the pressure on the automakers and their private jets (which I contend – do make some sense) – what else will they focus on.
    You have much more faith in our elected officials than I do. Did you hear Mr. Frank ask the one CEO what he wouldn’t do if he didn’t get his bonus? The question isn’t about unfair bonuses… it’s about bonuses in general – calling it a bribe! From a guy who takes money to influence legislation! C’mon… these guys/gals have no moral compass.
    I very much believe, given the opportunity, they would regulate everyone’s pay – doesn’t the current issue on pay transparency and equal pay go to the heart of that? By legislating both – they are by default managing pay by putting constraints in place to influence the outcome.

    Reply
  6. Karenm says:

    Paul,
    re Pay for performance, you stated that we tried that but it didn’t work? – this confused me, who tried it where it didn’t work? see the following http://www.management-issues.com/2007/4/10/research/performance-related-boost-to-ceo-pay.asp
    See also http://www.nber.org/digest/feb98/w6213.html
    http://money.cnn.com/2006/10/04/news/companies/ceo_pay_survey/
    Re Transparency in Pay, well that is a bit outdated because in 1996 SEC changed how companies report pay – and displayed the total compensation, and how it is broken down..
    We removed Government Intervention from WalStreet (pun intended) about 10 years ago – around the same time we started seeing the rise of CEO pay, and more corruption – which has led us where we are today. It became so corrupt that even the Justice Department had to have an overhaul.. Some people still ask, why Would that former Government want a Full Republican (and corrupt) justice department..
    Madoff comes to mind? anyone? has anyone watched the Hearings regarding the SEC and how Markopolos said he feared for his life??
    Salaries rose for CEO’s but at the same time across America, we saw Average Wages drop 7 times in the past 8 Years.. Companies cheapened the wages so much, that they cheated themselves into bankruptcy. Reaganomics in Reverse is my personal tag for this.
    The CEO didn’t care, they didn’t just have golden parachutes when they left, they also had golden parachutes in DEATH!
    Today, we Need more regulation not less.. but I think that this says it best..
    —– “In today’s regulatory environment, it’s virtually impossible to violate rules.” — Bernard Madoff, money manager, Oct. 20, 2007 ——
    karen m

    Reply
  7. Paul Hebert says:

    Karenm – thanks for the comments.
    Pay for Performance – I wasn’t saying pay for performance doesn’t work – it does work – we just don’t like the outcome. My point was that whenever a CEO makes a boat load of money we don’t like it and find reasons why it’s a bad plan. Stock options and other pay for performance ideas that tie income to stock price have unintended consequences such as shorter term thinking – mergers, acquisitions, etc. that may not be in the best long-term interest of the company.
    My point on transparency was that it was one of the causes of increased CEO pay. And with new legislation that transparency issue will be trickling down to other jobs/functions and that will either lower all pay or increase all pay.
    As far as reducing regulation, don’t see how the passage of SOX could be seen as reducing oversight with all the requirements for reporting.
    In addition, as you mentioned, those companies being led by corrupt (morally and financially) leaders cheated themselves into bankruptcy – except they didn’t – the Government is bailing them out. Isn’t that the same as rewarding cheating?
    I’m not debating whether there were loopholes in the laws and regulations – there always are. I’m not here to comment on the “republicans/democrats” issue – that’s for a different forum – I’m just suggesting that be careful what we ask for — it’s a short trip from regulating CEO pay to regulating ALL pay.

    Reply
  8. william says:

    The key take away is, don’t put yourself in the position of taking government money as there are always “strings attached”.

    Reply
  9. Karenm says:

    Personally I find that the outcome for Pay For Performance is much more promising and allows for fairness to companies. What we have seen happen in the past 10 years obviously didn’t work..
    In fact, there has been significant proof that PFP brings more rewards to the companies, and stock holders in the Long Term – rather than the Short Term Rewards which we saw in the last 8 Years. (Notice how many people are waking up from the We Dream and realizing that none of what happened was real”
    The increase of pay, came about due to Corporate Greed and fraud. CEO’s Pay is determined by Board of Directors, these Board of Directors Are often CEO’s where their Friends (also CEO”s) are on the board of Directors.. Get the funny stuff yet?
    So what we have is Greed perpetuating Greed..
    For the past 8 years, we had an Administration that removed or made defunct the most significant regulations that was in place.
    The SEC for example allowed Madoff to do what he did for Several years, even though they had been warned..
    Is it because Madoff had once headed the SEC? or was it because the SEC was part of the Tainted Justice Department issues that have been under investigation for the past 1.5 years
    — see “Wah, Mommy the justice department won’t play with me” http://twurl.nl/dywv8j
    These people Cheated not only their employees, but also the American public, but the biggest Shame, is that WE the American Public allowed this to continue by cheating ourselves for so long -the government isn’t bailing them out for the sake of bailing them out.. they are making sure these companies keep Jobs, and have money to give to other companies to keep jobs..
    Without Jobs,then the Misery index in America will continue to rise, and the more we plummet into a depression
    Paul, Many in this industry for the past year have perpetuated myths about the economy, stating how stable it was.. that we had low unemployment, and that there was a war for talent, and how great things were..
    LongTerm unemployment has been at RECORD Highs for over 6 years! We have seen the middle class diminish for 6 years, as wages were on the continual decline.. The most affected was Payroll per 1000 – which was the most affected. We were losing jobs by the millions, but yet, unemployment in this country was allegedly stagnant.. yet we never questioned this..
    We Never Recovered from the last recession – and Our Misery Index demonstrated those numbers, but they were not the numbers that the Government would publicly display.. and we were misled
    Ergo the need for transparency, as it is due to the lack of full information that we in America, just accept it all to be the way it is to be, and never for one moment stopped and asked what is going on.
    RE regulation of Pay has been around since the FSLA – the Minimum Wage.. and it was the Removal of the National Minimum Wage that we also saw a deterioration of the middle class.. and a rise in the Misery index.. Since the raise of the wages this past year, we are already seeing more americans being able to save today.. (they do need to spend though, because that does maintain jobs)
    So personally, I do hope that Wages do continue to be protected by the Federal Government.. and will continue to be regulated..
    FYI — in the past 8 years alone the DOL reported that Misclassification of labor is at Record highs.. that nearly 80 Percent more companies are misclassifying – that is Taxes to the State, City and Federal Government that the country needed and was not receiving.. an example is fedex who will be paying 1 BILLION dollars in back taxes – Part of this is the Burden that they put on their EMPLOYEES – for shame..
    It is a challenge for me to feel sorry for the CEO who pads his back pocket at the expense of his employees.. and Yes, we need more disclosure of what is happening..
    This all reminds me of Michael Moore’s Roger and Me..
    Regarding your comments re SOX — look around you, at the fraud on WalStreet, and ask yourself, do you think those who were Meant to administer regulation was doing their job.. or that SOX is today as it was first written?
    FYI, this isn’t about Republican versus Democrat.. my comments about the Administration is Exactly what happened and it definitely was about hiring republicans.. again to better understand the facts on this . please see — see “Wah, Mommy the justice department won’t play with me” http://twurl.nl/dywv8j
    Thanks for allowing my rant, but this is something that Has been a concern for me for several years.. but to which we had turned a blind eye to back then, and some continue to do so still today..
    Karen M

    Reply
  10. Bohdan says:

    One of the principles of a free market is access to information. Transparency of pay may allow the price of CEOs to settle out more accurately than it does now.
    Claiming that CEOs will demand more money because they see a counterpart making more than themselves is likely valid. This simply means the Board of Trustees should know why their CEO is worth what she is worth. The Board needs to be able to explain to themselves why a CEO is at a certain rate.
    If CEOs can simply bully boards into paying them whatever they want, the purpose of the board becomes significantly reduced.
    In addition, arguing that CEOs must simply be at the top of every list is spurious. They may be true of some, but you don’t provide a reason to believe it is true of all. Anyone who thinks they are the absolute best at everything and whatever they are doing is worth the absolute most in the market has extremely poor judgment. If such a person is your CEO, fire her.

    Reply
  11. Paul Hebert says:

    Appreciate the well thought out comments. Keep reading – I’m sure there will be more FOT posts that will get this type of discussion going!

    Reply

Leave a Comment