CEO Pay: Ready to Draw the Line?

At a time most employees can barely remember their last substantial raise, median CEO pay jumped 27% in 2010 as the executives’ compensation started working its way back to prerecession levels, a USA TODAY analysis of data from GovernanceMetrics International found. Workers in private industry, meanwhile, saw their compensation grow just 2.1% in the 12 months ended December 2010, says the Bureau of Labor Statistics…

Median CEO pay in 2010 was $9.0 million, based on 158 Standard & Poor’s 500 index companies with the same CEO serving all of 2009 and 2010 that have reported CEO pay, according to the USA TODAY analysis of data from GovernanceMetrics based on proxies that have already been filed. (CEO pay soars while workers’ pay stalls –, 4/1/2011)

As William Lazonick, professor at the University of Massachusetts points out in the article, while companies in the S&P 500 boosted profit 47% last year, much of that was due to cost-cutting and layoffs. Actual revenues for selling goods and services grew at only 7%. How much longer can businesses grow profits through layoffs and cost-cutting?  If businesses are really becoming more efficient, shouldn’t workers expect raises and shouldn’t shareowners expect rising dividends.

I’ve been thinking about “say on pay” votes lately, trying to figure out how I should vote as an individual retail investor. I’m relatively lazy when it comes to researching clawbacks, holding periods, correlations between pay and performance and all the rational factors that go into voting by large institutional investors like CalPERS or voting advice from Glass Lewis or ISS. Usually, I’ll look up on or to see how others who put time and research into their efforts are voting.

However, after talking with some large progressive institutional investors, I’m concerned that none appear to be using any decision models that address the “Lake Woebegone Effect,” where all the children are above average.  Former DuPont CEO Edward S. Woolard, Jr. speaking at a Harvard Business School roundtable on CEO pay said,

The main reason (CEO) compensation increases every year is that most boards want their CEO to be in the top half of the CEO peer group, because they think it makes the company look strong. So when Tom, Dick, and Harry receive compensation increases, I get one too, even if I had a bad year…. (This leads to an) upward spiral.

Every year companies want to pay their CEOs more than average and every year when compensation consultants survey a company’s peers they find that average going up. Yes, it is a little simplistic but one way to stop that spiral would be if every shareowner voted against every CEO pay package that is above the median. For 2010, that would be every pay package above $9 million.

I’m not sure what CEO pay should be but I find it difficult to believe that any CEO would work 30% harder for $12 million than they would for $9 million. Personally, I almost always worked at full capacity no matter what my pay because I enjoyed my work and it was meaningful… I still do and it still is.

I started my career as a teacher. It was long before Alfie Kohn wrote the book Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes but even back in 1970 I felt that rewards and punishments were artificial ways of manipulating behavior that destroy the potential for real learning. Instead, I found it was better to design classroom experiences to provide an engaging  atmosphere so that students could act on their natural impulses to explore and gain knowledge.

Most social psychology studies show the more you reward someone for doing something, the less interest that person will tend to have in whatever he or she was rewarded to do. Instead, their focus moves to the reward itself. Isn’t leading a Fortune 500 company intrinsically rewarding? Shouldn’t $9 million be enough for anyone for one of those jobs?

As long as shareowners approve outrageous pay packages for CEOs the averages will keep ratcheting up and the disparity between the top 1% and the rest of us will continue to grow. We need to ratchet down the Lake Wobegon effect and bring our CEOs down to earth.

Yes, I’m still going to check and to see how others are voting. If Florida SBA or CalSTRS are voting against a pay package I’m likely to join them. However, a couple of weeks ago, I voted against Andrew Gould’s $15 million pay at Schlumberger just because it was too much. I might just do that for all pay packages over $9million. What do you think? Can $9 million ever be too little?

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  1. » Pfizer and Johnson & Johnson: AFSCME Proxy Recommendations - 04/17/2011

    […] but if I did I would also vote against the compensation plans using As I said in CEO Pay: Ready to Draw the Line?, I’m concerned about the “Lake Woebegone Effect.” As former DuPont CEO Edward S. Woolard, […]

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