Executive compensation has been a hot-button political issue since the 2008 economic collapse, the resulting bailouts, and following that, the Occupy Wall Street movement. You can find varied and conflicting viewpoints on income inequality and its impact on political and economic systems. But as a human capital consulting firm, the question for us is whether the methods for establishing CEO pay are effective for companies.
A new study from the University of Delaware's Weinberg Center for Corporate Governance offers some interesting insights and caused a bit of a stir. (It's been profiled in The New York Times, The Wall Street Journal and the Harvard Business Review.)
The authors argue that CEO compensation models are flawed. The basic system is that companies want to pay their chief executive above the average in their market -- both to draw the best talent in the market and to signal to their investors and competition that their talent is better than the rest. The effect is that the average compensation keeps increasing, faster than inflation, profits and worker's wages.
The supporters of ever-escalating pay argue that handsome compensation packages are necessary to keep CEOs from straying to greener pastures at other companies. But new research by a University of Delaware professor and student suggests fears of CEOs jumping ship are fiction.... [Researchers] compiled data on the CEOs of 1,500 companies over the last 30 years. What they found was surprising: Top executives almost never leave for other companies. Among the thousands of CEOs included in the study, only 27 left for another position, and most failed in their new positions.
You can read the whole study here.
There are some tidbits in there that we at Morgan Samuels have known for a while, both intuitively and from experience. You can't plug and play different executives and hope their profits come along with them to their new office. Fit and culture matter significantly. (It's something we place a big emphasis on with our executive search practice.) So why offer big compensation packages? This might seem obvious, but just because your competition shouldn't steal your rockstar executive doesn't mean they won't. You can't blame the executive for taking the better deal. And even if they aren't likely to leave, morale is important, even among high-powered executives. You don't just want your leadership in place, you want them happy.
But on the flip side, part of delivering maximum value to shareholders is ensuring they aren't overpaying for any commodity, and that includes human capital. So what's the solution?
Morgan Samuels is of the view that almost any problem can be eliminated or ameliorated with better information. Which is why one of the human capital consulting services we focus on is market intelligence. We like to know who in our target market is earning what compensation, how they're performing, who is happy in their jobs, and who is looking to move. Knowing all this gives our clients a leg up. It gets them closer to finding that perfect dollar amount where executives are excited to come to work and shareholders are happy with the balance sheet.