Monday, April 11, 2011

CEO Pay in 2010 Up From 2009

I couldn't think what to call this blog post. What brought the topic up for me was an article from the 4/10/11 (yesterday) edition of the New York Times. You may have seen it already as it certainly made the rounds on the social networking sites yesterday.

Here are some of my general comments on the article:

  • Many corporate CEOs make far more money than they deserve.
  • Shareholders now have an opportunity to speak their collective minds on that through the Dodd-Frank Say-on-Pay vote, but only four companies have had the shareholders reject their compensation plans for top executives.
  • The pay that the New York Times article cites appears to be "Total Annual Compensation" from the proxy statements. This is not pay the way you and I think of it.
  • Dodd-Frank has a section which will require companies to show the ratio of such pay to that of the median employee in the company, and while this particular calculation is misguided, it does lend some insights into CEO pay.
  • You probably don't know what goes into this Total Annual Compensation number. Did you know that it goes up and down from year to year due to things like timing of equity awards, underlying discount rates, and corporate performance?
Let's revisit that last question. CEO pay tends to go up when the return on a shareholder's investment improves. Duh! What exactly are the major goals of most corporate CEOs? Isn't one of them to provide a better return on investment for shareholders? So, as a general concept, what is the problem with compensating CEOs better for better performance?

With regard to another item, CEO Total Annual Compensation tends to have more variability than it used to because more of their compensation is tied to shareholder return and stock price. How did this happen? Well, corporate governance models have suggested that significant portions of CEO compensation be in equity and that even for cash compensation, large portions be tied to performance. Hmm, you ask corporate America to adopt a model, they adopt it, and you criticize them for the results of your demand -- what's wrong with this picture?

Where I do have a problem though is with trends. Unemployment figures in the US have stayed high. Yes, they have come down a little bit, and whether you believe that decrease in unemployment to be truly reflective of positive employment figures or not, far too many people remain unemployed. In a nutshell, most large corporations are not doing much hiring. At the same time, pay raises for the rank and file have been horrible. While inflation numbers have been low for the last two years as well, those numbers have so much embedded convolution that they are not, IMHO, remotely reflective of changes in the cost of living for average Americans.

Further, suppose we look at real pay for working Americans. It has gone down, and that decrease has been significant. "How can you say that, John?" you ask. Well, let's consider. If CEO pay is to include the total value of the reward that they receive for doing their job, than perhaps so should yours and mine (the fact is that the value of employer-provided healthcare benefits is one of the items that is excluded). Here is how I would like to look at trends in pay for you and me. Given consistent behavior (you don't change your benefits elections), has our take-home pay gone up or gone down? For many of us, meager pay raises combined with increases in our share of the cost of benefits, and further coupled with cuts in the value of  those benefit programs means that at the end of the day, we are seeing less value from our employers, even in times of high corporate profits. Aren't you and I, or at the very least, the collective we composed of all the little people at a company, contributing to that excellent corporate performance? If we're not, then how and why are our employers succeeding?

This is what people should be upset with. If the wealth is being spread among all contributors and shareholder's are seeing expected (or better returns), than all is well. But, when the wealth is being spread among just a few, then things are wrong. Sadly, the Times article devoted only one small paragraph to this.

Author's Note: My current employer is a small, private firm that to my knowledge has not followed the large corporate trend of cutting real employee pay.

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