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What are you worth?

September 2, 2010 Articles, Business & Commerce No Comments


Despite the recession, CEOs continue to pay themselves vast sums while expecting others to suffer – with those CEOs who slashed their workforces the deepest earning the most. As a new report puts it, “CEOs laid off thousands while raking in millions.”

A report published 1st September by the Institute for Policy Studies in the US, shows that CEOs of major US corporations averaged 263 times the average of American workers.

In the 1970s very few CEOs made more than 30 times what the average worker earned.
What has happened in the intervening decades?
The report points out “executive pay overall remains far above inflation adjusted levels of years past. In fact, after adjusting for inflation, CEO pay in 2009 more than doubled the CEO pay average for the decade of the 1990s, more than quadrupled the CEO pay average for the 1980s, and ran approximately eight times the CEO average for all the decades of the mid-20th century.”

Unfortunately, that’s just the start of the bad news in this report.

The further disturbing finding was that “In 2009, the CEOs who slashed their payrolls the deepest took home 42 per cent more compensation than the year’s chief executive pay average for S&P 500 companies.”
So it would seem that CEOs who act tough by cutting employee numbers, get better rewarded by their boards. One wonders how long such short-term strategies will last.Surely companies headed by these CEOs must eventually crash and burn (well, at the very least they must run out of good people).

The highest-paid ”lay-off leader” was Fred Hassan, former head of the drugs company Schering-Plough, who earned $US49.7 million, largely through a $US33 million golden parachute as he left following a merger with rival Merck. As a result of that merger, some 16,000 employees lost their jobs.

Another top-paid boss who slashed jobs was the Johnson & Johnson chief, William Weldon, who received $US25.6 million following 8900 lay-offs.

It’s interesting to note that both of these CEOs come from the pharmaceutical industry where gross profit margins are often around the 40% mark and regular write-offs for poor product quality (that go unpublished) or recalls, cost millions. It seems that it may be easier to keep profit margins high by laying-off staff rather than becoming more efficient through implementing better quality management practices.
Will the recent legislation enacted in the US that enables shareholders to have a say on CEO pay, make any difference? If the UK experience is any guide, the answer is an unequivocal “No”. There, CEO pay levels today are substantially above pre-2002.
If legislation doesn’t seem to work, what will?

Well, perhaps the legislators are looking at the wrong metrics. Current US and UK legislation leaves the final “say” on executive salary to shareholders. The question must be asked, who are these shareholders? In the 1990s, shares were held on average for a period of two years. Today they are held for less than five months.

Can these short-term shareholders be interested in the long-term success of the company?

A better metric for the legislators to use would be the one we started this article with – the number of times the CEO’s salary exceeds the average worker in his or her company.
It’s been reported that Peter Drucker, the doyen of management philosophy and practice, once suggested to his students that “CEO salaries should be a maximum of 20 times the salary of the lowest paid worker”.
How would this work in practice?

Any good pay scheme for CEOs should have four components:

1. Base salary.

Needs to be in line with industry standards, appropriate to the role and to be seen as “fair and equitable” both within and external to the organisation.
This should be the major component of the package. For CEOs, it would be limited to 20 times the rate of the lowest paid worker within the organisation (or if that seems too stingy by today’s standards, 20 times the average company salary).

2. Share of company profits.

Needs to be calculated on net profit prior to distribution to shareholders.
This should be the second highest component of the salary package for CEOs and senior executives. Once again, it would be limited to 20 times the share of profit received by the lowest paid worker (Yes, that’s right, everyone should share in the profits). Profit share would be approved by shareholders through their reps, the Board.

3. Team performance rewards.

Based on a pre-determined set of criteria and relative to the top team’s performance.
This should be the third ranked level of salary package component. Limited to 20 times the bonus reward for the lowest paid organisational team performance. Up to a maximum of 20% of average individual profit share (as in point 2).

4. Individual performance reward.

Based on the achievement of pre-set goals.
This should be the least component of salary package. Limited to 20% of base salary.
What gets rewarded, gets done.

This approach to remuneration, rewards; teamwork, a sense of community, a drive for performance, and above all a sense of “we are in this together” – all stakeholders working for the betterment (and rewards) of the organisation.

© The National Learning Institute


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