Are American CEOs confident enough to try a performance-based compensation model?
In pro sports, both older athletes declining in performance and younger, unproven ones in their physical prime will sign incentive-laden contracts with relatively low guaranteed salaries. This equates to a probationary period — if you produce, your salary goes up next year. It worked just dandy for future Hall of Famer Frank Thomas. He signed a $500K one-year deal with the Oakland A’s at age 37, performed amazingly well, then landed a two-year deal for some $9 million annually.
Dan Amos, CEO of insurer Aflac, accepted a similar challenge: In May 2008, Aflac became the first U.S. company to embrace a say-on-pay structure, with shareholders voting on Amos’ compensation. How did Amos fare? Well, reflecting the fact that Aflac stock increased over 3,000 percent during Amos’ 18 year reign, over 93 percent of Aflac shareholders agreed he was worth his $11.96 million tab.
In 2007 average CEO pay in the U.S. was $10.5 million — 344 times higher than the average American worker's wage (figures compiled by the Washington, D.C.-based Institute for Policy Studies and Boston-based United for a Fair Economy). The American public is at last examining this ratio, and hard: Did these executives really contribute 344 times more than the average worker?
Certainly C-levels operating in complex financial environments and sectors require a rare degree of capability and experience. The shortage of people with this talent level is genuine, and given basic supply and demand, high remuneration for this very narrow circle is expected. History also shows that a single visionary can single-handedly grow a company into something extraordinary (a mighty fine horseless carriage, Mr. Ford), and if you ask their stakeholders, they are/were worth every penny.
That said, the mistakes in judgment that heavily contributed to the current financial predicament were made by some of the highest-paid(by extrapolation: “smartest and best”) executives in the world. Assuming that stratospheric salaries are the norm for this pinnacle of exec is to assume that all who bear or aspire to these titles come with a “base” level of “superskills.” The spectacular errors in judgment of pricey CEOs across the country — now, sadly exposed as commonplace — shows us that this is simply not the case. Just as not every baseball player is an A-Rod, not every CEO is a Buffet. (Warren Buffet’s yearly base? $100K, and a bonus tied to increases in shareholder value). The problem comes when companies pay good managers like great managers, confusing the difference.
Shareholder outrage is having immediate effects on the hiring packages of the future. Gone will be the compensation “carrots” that are counterintuitive to business success, the golden parachutes that allow for lavish compensation in the event of a firing, resignation or "early retirement” (see Bob Nardelli of HomeDepot). Instead of a system that implicitly rewards for failure, expect a system that only rewards (yet exponentially more) for success. The incentive for strategic risk-taking will still exist, but the parallel incentive for ill-considered risk-taking — those problematic parachutes — will be removed.
New contractual conditions will come with a different degree of oversight. As Richard Fuld’s Congressional testimonyaptly underscores, if ever a job requires regular supervision, it is the CEO’s. The risk of a CEO’s poor decisions is socialized across the spectrum of a company (anyone in New York out of work because of some chief officer’s lack of caution, foresight or simple greed? anyone?) and all levels of workers take the hit when such executives drop the ball. As we see all around us, even strong businesses can be run to the ground in a year. Stakeholders have been made painfully aware of this, and will not soon forget the lesson.
Gilded nameplates aside, being CEO is still a job. Jobs come with responsibilities, and with the natural expectation that these responsibilities will be fulfilled. As shareholder activism increases, even platinum execs will be subject to review processes, merit-based pay structures — and yes, the same career instability that the majority of workers face in the current job climate. The average worker combats this insecurity by proving his worth in every way he can, by bringing something to the table every day. This is how the vast majority of American workers operate, and the modern CEO will be no exception. The simple truth is that career instability is a great motivator.
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Anu Rao is a Senior Writer at Vault.com. She has her BA in English from the University of California at Berkeley, and is a Masters candidate at NYU, studying Communications, Media and Marketing.
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