You see and hear a great deal about inequality these days. It has become a hot political issue to some, but many seem to take the “I’m doing okay” attitude and ignore what has been going on in recent decades.
Every year or so, a stream of articles are released across the media about how Chief Executive Officer (CEO) compensation is outrageously high. The statistic that is used most often is that the average CEO of a Fortune 500 company has a compensation package that is 360 times greater (some say 320 times) than the average employee of that firm.
Eye popping numbers such as that certainly get people’s attention and make for good copy. The question few people ask is how did this happen over the past several decades? I have a few theories that I will share with you. Sadly, I do not see a workable solution to the issue.
If you study annual reports of leading companies, they often give detailed information on the different committees that outside members of the board of directors serve on in the organization. Look closely and two things pop out. First, the CEO of the company often serves on the board of directors of a member or two of his or her own board. Interlocking directorates are a real thing. Dig a bit deeper and you sometimes find that their “friend” who has the CEO as a director in his or her firm is surprisingly often on the compensation committee to determine the salary, bonus and perks of those in the executive suite of the corporation. Or perhaps a CFO or Vice Chairman is on the friend’s board.
So, if you have a buddy or two on the compensation committee, who is also the CEO or senior executive of a company of which you are a director, your compensation will likely not be “light” when it comes time for the group’s recommendation for your next year’s salary or bonus.
If you speak with many people about this apparent conflict of interest, they smile and often say that the problem can be alleviated by hiring an executive pay compensation firm. This, to me, is laugh out loud funny. Think about this for a moment. If a compensation firm continually low balls (translates provides realistic) compensation package for a CEO word gets out and the firm suddenly has fewer clients. They often provide recommendations by “benchmarking” what leadership is getting in companies of similar size or competitive category. So, recommendations of these non-partisan experts often maintain the status quo. The compensation committee on the corporate board do not often enough buck the compensation firm’s recommendations.
An argument that some people use is in defense of lush compensation is that today more is expected of a large company CEO. Yes, the world is more complicated. A CEO must have a better grasp of economics, world events (most huge companies operate globally), and public relations than leaders in the past. They also have need to be media savvy. With the growth of CNBC and Bloomberg, CEO’s have become celebrities and cannot behave in public as some 19th century robber barons did. While this is all true, they have teams of experts around them, and they are better educated than most leaders a generation or two ago.
For a few decades now, Warren Buffett has told us that when you buy shares in a company take the attitude that you are an owner of the firm (because you are!). As is often the case, I agree with the great Buffett. So, as an owner, read the annual report and spend some on the compensation of those in the executive suite. If the company had a poor or mediocre year, should the CEO receive a lusty bonus? Was compensation tied to stock market valuation of the company and you noticed that the company bought back many millions in shares even though the stock was trading at an all-time high? Does the employment agreement contain an enormous golden parachute that kicks in even if the CEO was fired for poor performance?
If you are an “owner”, read up on your company. People tell me that they only own 100, 500, or 1,000 shares. What can they do? Write a strongly worded letter to the board. Vote against what you deem to be exorbitant pay packages. After all, it is your money.
Some counter that the company has made them rich or comfortable. This is especially true in highly successful tech companies. They do not begrudge the founder or current leader eye popping salaries, bonuses or sweetheart stock options. I get that. Yet all 500 companies have not made their shareholders financially comfortable.
My long-term fear is that if the present trend continues more people will want Congress to set income caps for senior executives in publicly traded companies. Do you really want Senator Elizabeth Warren writing that legislation? I greatly admire how she took down some financial executives after the 2008 debacle. At the same time, I do not want her and fellow travelers interfering with the policies of US companies operating in a somewhat free market. Let the owners decide!
So, if you are a shareholder of any size, study how YOUR company is operating. You may be surprised at what you find.
If you would like to contact Don Cole directly, you may reach him at doncolem
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