business

The Compensation Silly Season

Posted on Harvard Business Review: April 28, 2011 11:18 AM

Tis the season when public companies publish their 10Ks, complete with the Compensation Disclosure and Analysis section revealing the pay of their five most highly paid officers, including the highest paid of all, the CEO. When these figures are made public, the business media have a field day. From Bloomberg to The New York Times, the message is always the same, that the titans of Corporate America are highly overpaid.

Comparisons are made to other U.S. executives, CEOs in other countries, and the average company employee; articles dwell on the relationship between CEO pay and measures of company performance. The major media theme for 2010 is that CEOs have received huge increases reminiscent of the good old days before the Great Recession, while the average employee lucky enough to still have a job has not seen a boost in her pay check at all.

While these critics have a point about income inequity in America, their arguments don't add much insight to the debate about how these executives are paid and whether these huge incentives in cash, options, and stock really do motivate them to work harder or smarter.

Why so little light from so much coverage? First of all, these accounts report one gross figure with little or no information about how the amount is divided between salary and incentives or about the nature of the incentives. At the same time, they completely ignore the fact that the great majority of these executives would work equally hard for much less. Pride and loyalty to their colleagues and their company are also major factors in their work life.

Another aspect of the silliness of this season is that most critics use as their key metric for company success the annual change in the company share price, as well as other short-term indicators of company economic performance. What makes the focus on such measures silly is that there is increasing evidence that successful CEOs focus on longer-term drivers of company success, such growth through new products and businesses or global expansion, which take years to achieve. In this way they ensure that their shareholders won't be the only ones rewarded; so will various stakeholders, including employees, customers, and suppliers.

I have no problem with journalists, shareholders, and others keeping a watchful eye on executive compensation. Such surveillance gives board compensation committees the backbone to create reasonable plans that provide valid incentives, while eliminating egregious lump sum payments like golden parachutes and handshakes. Beyond that, there is certainly the possibility that the say on pay provision in the Dodd-Frank Act will empower shareholder oversight as investors express their (admittedly non-binding) views on executive pay packages.

Going forward, annual critics of executive compensation need to get beyond conventional wisdom and the superficial. They have to probe much deeper to understand the complexities of compensation and the importance of long-term corporate performance. This will enable us to engage in a serious dialogue rather than react to headlines and stories that do little more than stoke the flames of popular/populist resentment.

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