Posted by Chuck Csizmar | Posted in Articles, Universal Compensation | Posted on 26-03-2014
Here they come again, those who question the pay-for-performance credentials of the current executive pay process. Every spring, like daffodils popping through the warming ground investigative articles appear to challenge the validity of how the executive suite is rewarded. Critical commentaries by notable Compensation experts, as well as a financial analyst here and there, will question whether job performance has warranted the amount of financial rewards reported in proxy statements.
What follows is usually a series of back-and-forth sound bites and written pieces both criticizing and defending the logic of the executive reward process. However, those who press their divergent viewpoints seem unable to reach consensus on an equitable process, and so next year the cycle of reward and debate repeats itself. Such has been the case for years.
In my mind though, it’s the proverbial “man in the street” or “court of public opinion” that truly matters. And if you take that point, that it is the general public who needs to be convinced that corporate leadership isn’t gorging themselves on financial largesse like hogs at a feed trough – then the multiple explanations that appear each season touting the rightness of executive pay fall disappointingly flat.
Who is buying this story?
Unfortunately it’s not the negative impressions of the general population that’s being addressed by these pundits, but instead you often find complex arguments presented in support of the executive leadership. This is a circle-the-wagons strategy crafted by status quo enablers to refute challenges to the current executive reward process – by providing a technical defense that wouldn’t be understood by that same general population.
I recall a former CEO once telling me, it’s a matter of optics; the present system of determining executive suite reward looks bad to the general public. No amount of explanatory formulae or charts and graphs is going to change that impression; the more complex the defense the more skepticism that will be generated.
Another senior executive cautioned me that if I couldn’t sell my proposal on a single sheet of paper, including a lot of white space, then my arguments wouldn’t convince him. In other words, keep it simple, keep it clear and keep it brief.
All too often the defense of executive pay is presented as a series of formulaic methodologies to be utilized by corporate leadership (with the support of consultant intervention) to refute their critics. However, even as these diverse calculations try to make their point the wider audience remains confused, skeptical and unconvinced, so how has the argument been advanced? The executive reward process will still look bad.
I support the idea of measuring performance to gauge the amount of reward. Who can argue with that? But the convoluted process being described by those who tout the current approach is flawed by its complexity, by its confusing array of acronyms and ultimately by its inability to explain itself in laymen’s terms.
Can you repeat the rationale back to me?
Apologists for executive pay often fail to explain a key element of pay that looms large for the rest of us – determinants of “how high is up” or how much is “enough” reward. Given that for similar performance non-executives typically receive considerably less reward, it’s disappointing that this disconnect in thinking is so often ignored. A large portion of the looks bad picture is the amount of the reward. Should those on “mahogany row” have parameters for their rewards, even maximums or caps like the rest of the population? That sounds fair, doesn’t it?
The problem with connecting a pay-for-performance concept with examples of executive pay excesses is an optical one – it looks bad! Attempts to rationalize the practice with complex terms, charts and theorem won’t convince anyone outside of the board room. The way to change that negative impression is to challenge the convoluted methods that executives use to rationalize their reward structures. The general population (not the financial analysts, proxy readers or even compensation specialists) wants to see a direct cause and effect (simple, clear and brief; performance equals reward), as that is how they are rewarded in their own lives.
Why make rocket science out of a basic concept?
Unless you’re hiding something.