Executive Pay

An October 2012 SHRM article mentioned that in the 1970s management theorist Peter Drucker suggested that top executive compensation should be 20 times the amount of the average worker pay. Yet according to a May 2012 Economist online article, the Economic Institute calculated that chief executives at America’s 350 biggest companies were paid 231 times as much as the average private sector worker in 2011. The media have shared developments about the array of “Occupy” movements that have taken place recently, as well as the various explanations as to why they have occurred.  One primary factor cited for these Occupy movements was executive pay.

One thing is certain, executive compensation is a concern to many individuals, and has been for some time. How large of a concern executive compensation is, and why it is such a concern, is our topic for this issue of Astronology.

Eleanor Bloxham, founder and CEO of the Value Alliance, mentioned to SHRM that a large pay disparity between executives and employees results in low morale and a negative impact on CEO effectiveness. “People feel disconnected from the CEO. They are not willing to share with management what could be fixed or improved. The people on the ground don’t feel that top management understands them.” CEOs have “become disconnected, not understanding what their employees have to deal with or what their customers are going through. They’re in a protective bubble.” Clearly such attitudes negatively impact an organization. Especially in the times we live in, the economy has gotten better, but it still rocky in various sectors and industries. Can you imagine the frustration of the employees who haven’t received a substantial wage increase while their executive counterpart continuously receives such increases or large bonuses? Or perhaps, the feelings of employees who perceive those executive compensation packages to be reality, even if they are not the truth?

SHRM also highlighted the opinion of Donald Delves, founder and President of The Delves Group, regarding the matter of executive compensation. He feels that executive compensation is not really out of control. “It’s just high, and there’s a difference,” according to Delves. He highlights that the Sarbanes-Oxley Act, the Dodd-Frank Act, and the 2006 Financial Accounting Standards Board requirement that granted stock options be recorded as an expense have all contributed to CEO pay not accelerating since 2001 as it did in the 90s. “CEO pay went down during the recession, and as corporate profits came back up, CEO pay went back up.” He does admit that despite this fluctuation the pay disparity between executives and staff is still a “very serious societal problem.”

The Economist article mentioned that disgruntled shareholders are vocalizing their displeasure. For example, in March of this year, the Ontario Teachers Plan (Toronto), shareholders of Hewlett Packard Co. (HP), let their intentions be known by voting against the re-election of two directors on HP’s board, and opposing the company’s executive compensation packages. In May 2012, the head of British multinational insurance company Aviva stepped down after more than half of the investors voted down proposed executive pay packages. But is that enough? What else can be done to alleviate the pressure surrounding this problem?

In November 2012, Towers Watson revealed results of a poll of 253 U.S. companies which highlighted that 45% either made or will make changes to their executive pay programs in favor of strengthening the link between pay for performance. Half plan to or have changed the performance measurements which determine incentive payouts. Andy Goldstein, leader of Towers Watson’s executive compensation consulting practice for the central U.S., says of the survey, “The bottom line is that each company is different, and there is no single approach that is right for all companies.”  Astron Solutions concurs with this assessment.  As National Director Mike Maciekowich notes, “cookie cutter compensation packages – whether for staff or executives – often fail to meet an organization’s unique employee attraction and retention needs.  While a compensation offering should reflect each organization’s unique reality, all employers must ensure effective stewardship of limited financial resources.”

Astronology wants your input. Please write us, and let us know the following:

• Has your organized tackled the great executive pay debate?
• What is the approach your organization has taken in handling executive pay?
• Do you think it this current approach is effective?
• If not, what improvements would you like to see?

We truly do appreciate your input.  All responses will be kept in strict confidence.  Summary trend data may be highlighted in a future Astronology article, to continue the great executive pay debate!