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- Star Wars: CEO Pay
What’s the Story?
Earlier this month the Financial Times asked “How much is it worth to retain a star CEO?”.
Drafted by a former investment banker, the article referenced the CEO pay at Disney, JP Morgan, Goldman Sachs and GE.
The compensation items include a five times bigger annual bonus at Disney, a stock option retention award of some $50m at JP Morgan, a retention “Shareholder Value Creation Award” of $30m for the Goldman CEO and an “Inducement Award” of $7.5m; then replaced by a “Leadership Performance Share Award” worth an estimated $300m for the GE CEO.
The author says:
“Why do the boards of companies feel the need to give their already wealthy and properly rewarded CEOs, even more financial incentives to do their jobs? None of the boards has satisfactorily explained its logic, beyond the usual, corporate drivel. Notably, the majority of shareholders voted against the 2021 JP Morgan and GE executive remuneration plans in non-binding say on pay.”
And finishes to say:
“ At a time when income inequality is reaching absurd levels, when is enough enough?… I don’t have a good answer, but I sure would like to know.”
The article attracted some 70 reader comments, almost universally critical, including one from The Sage of Omaha, Warren Buffett, who questioned outside director independence when making compensation decisions.
Why Does it Matter?
When a former investment banker writing for one of the pillars of the global capitalist press, has major criticism of executive compensation, many will see the system for top pay as flawed.
This is not a cost issue, big companies with big profits can afford to pay big bucks. But it does sap employee morale, particularly when general pay is constrained or when there are job losses in point.
Furthermore, investor trust in the board may be eroded. Top pay items which are subject to much criticism can lead to questions of lack of skill, poor judgement, or compromised independence. And if they can err on top pay, what other decisions might be flawed?
The current top pay system already attracts huge disclosure obligations, shareholder votes, and investor relations attention. Yet is still seen by many as unjust and fatally flawed. Ongoing calls for yet more governance rules are likely.
Retaining the CEO is a bigger issue if the talent pipeline is weak, or if onboarding top talent is cranky. Investment in both those aspects reduces leaver risk and should be a major focus for attention. It’s not just about incumbent pay.
Newspoint View
Both shareholders and governments have tried to combat perceived excess. Extensive pay disclosure, Say On Pay votes, limits on tax deductibility and shareholder governance rules have been tried. Some calls for absolute limits on pay quantum, have not yet found favour. Adding yet more rules and governance is unlikely to provide a magic solution.
The current top pay system might not always produce good outcomes, but it is hard to say what might do better. Winston Churchill once famously said about democracy;
“It’s the worst kind of government, aside from all the other kinds that have been tried.”
So, knowing that top pay can attract strong criticism, as a minimum, compensation committees must adopt exacting standards on information, process, judgement and explanations. Even when error is absent, there remains much scope for disagreement on what is best for the business.
And another thought, in his book 21 Lessons for the 21st Century, Yuval Noah Harari says:
“ In order to keep up with the world of 2050, you will need not merely to invent new ideas and products – you will above all need to reinvent yourself again and again.”
With our world changing at an ever faster pace, new top talent can bring fresh perspectives new ideas and energy. Sometimes there is merit in planned churn.
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