The recent salary disclosure of Netflix CEO Reed Hastings was the subject of much conjecture, largely unwarranted (more on that in a bit), on the astonishing salaries that tech/media companies are paying their top bosses in recent times. Hastings made $24.4 mn in 2017, according to company filings, a jump of 5.17% in just a year from his previous $23.2 mn in 2016. Numbers released by the Economics Policy Institute begs the question – What drives boards to approve such astronomical figures to top serving executives in the US? The science of things doesn’t seem intact in the compensation universe, does it?
On the face of it, the mechanics that go into fixing pay are incredibly complex. That’s a given. However, do the stratospheric levels justify them? Management guru Peter Drucker advocated a 20:1 pay ratio between the CEO and the average worker in any organization. The ground reality points closer to 271:1 in 2016. We’ll leave the rest to your astonishment.
And the 99% vs 1% debate rages on with every talking head bringing new views to the fore every single day.
The raging debate in most business publications of repute, however, “is this justified?” With some even going as far as to suggest that boards favor higher pay for CEOs with similar political inclinations. In our quest to find a middle ground and a rationale to how the existing could fit into the ideal, we came up with the empirical. But first, a closer look:
NOT FOR NOUGHT- THE ACTUAL NUMBERS
Consider the fact that some of the largest corporations in the world, even those who are not in a moment of crisis, have paid out staggering figures over the past few years. Monsanto paid Chief Hugh Grant $19.5 mn last year. Goldman Sachs paid the evergreen (pardon the pun) Lloyd Blankfein 24 million in total compensation in 2017. Charter Communications CEO Thomas Rutledge was paid a record $98 mn in 2016, the highest among all US CEOs.
And then there are the known unknowns.
Privately held companies like Uber, ADM, Deloitte, and Koch don’t disclose their figures, but at their current size, a child could make out that their CEOs make figures that would probably stump most mentioned above.
LOOKING BACK AT THE WAVES AND TROUGHS
CEO compensation has had a history of closely following stock market trends, given the fact that they peaked in the US in 2000, around the time of the dot-com boom, and fell during the bust that followed, in most sectors. They were trimmed severely in 2008, in the light of the subprime crisis, and then rose steadily as financial wizardry in the quantitative easing era pushed them back up to their current levels. This may seem fairly obvious, but it is a crucial factor determining the end result of American CEOs notching their way up to the so-called 1% of the nation’s wealthiest. So, what do they have to say for themselves, again?
The greenbacks they make, that is. And economists are in agreement. Stanford professor Nicolas Bloom recently pointed out that a CEO’s job is “a 100-hour week, high-stress job. It consumes your whole life. It’s super stressful.” The US has the highest paid CEOs of the world, and this doesn’t seem to be going away anytime soon, with the heavy lobbying underway for the pay ratio disclosure clause in the Dodd-Frank Act to be nullified.
They are. Therefore, they are. From the average worker’s perspective, corporate boards and compensation committees seem to have failed average American workers, whose wages have risen by a measly 11.2% compared to 937% of the CEO. A typical example of thought provoking perspective here is a survey carried out in 250 companies by Stanford threw up some very interesting answers by directors that included a statement as
“The CEO role is difficult and increasingly complex. Finding truly qualified talent in recent years has gotten more difficult.”
“The CEO talent is difficult to vet and costly if you make a mistake. The risk of selecting the ‘wrong’ candidate is greater than any time in the past.”
“There is nothing as ‘stepping’ into a CEO role. I am less concerned about talent being available than I am about the culture fit of outside talent”
Clearly, the boards have their rationale in place, from the risk aversion angle. They prefer paying top dollar to someone they believe will have a grip on the company and the market. The watchword in the previous sentence is 'prefer'. We have to remember that board members have their own inclinations, prejudices, and preferences, and are not necessarily driven by market forces alone.
We just mentioned it - Market. Market forces. Market share. Market analysis. Market growth, and ultimately, market domination. Beyond the jargon, Every CEO is essentially the leader of a set of people trying to outdo the competition or coming into their own as a first mover in a blue ocean. CEOs are innovators and motivators at the same time. It would help if the CHRO had more weight in the entire decision-making process, although they have recently been included in most compensation committees in large, transnational corporations. But what of the smaller players further down the value chain? We at Top CHRO believe that the component breakup of the CEO should factor in a semblance of reasoning in base pay and a high degree of variables, with a lock-in period that ensures they are driven to navigate rough waters when the time comes. No shareholder or board would disagree that the truth is in the numbers, and the numbers have a huge scope of rationalizing from the current levels.