Tuesday, April 15, 2008

Executive Compensation: An Issue On Which All Candidates Agree

It is rare to find all Presidential candidates in agreement on any issue, but this morning Senator John McCain appeared on CNBC and had the following observation about executive compensation: "Greed and excess in corporate compensation is unacceptable in America. I'm not sure corporate America knows how bad their reputation is." Both Senators Obama and Clinton have also criticized not only the levels of executive compensation but the manner in which executive compensation is decided within most corporations.

Dealing with the results of disgruntled employees in businesses all across America, I work to ameliorate the consternation felt by those who suffer lower inflation-adjusted wages, increased costs of living and medical care, while reading their companies online SEC filings which, since 2006, have to reveal increases in executive compensation.

The fact that average CEO now ears 431 times the salary of an average production worker is not the problem, although many point to this literal disparity as a problem that continues to worsen.

The problem from an employee relations perspective is, interestingly, not literal, but relative. It is not so much how much the CEO makes but the fact that the average CEO enjoyed a compensation increase of 20.5% last year, this according to a study of 45 randomly selected public companies, while average revenues grew just 2.8 percent. By comparison, the median pay for workers rose only 3.5 percent, this according to the U.S. Bureau of Labor Statistics.

Why the disparity?

Many say it is an inherent defect in the way executive compensation is set, a corporate governance problem, with CEO pay set by the Board of Directors which ostensibly is there to protect shareholder interests. Yet, oftentimes the CEO is the chairman of the Board of Directors and few would argue he or she can reasonably and objectively monitor his own salary. The average board member, oftentimes selected or recommended by the CEO in question, are beholden to the CEO for whom they will make compensation decisions. In the end, many argue the answer will be found in making boards of directors more accountable, and to that end, Senator McCain, in the interview this morning suggested he favors shareholder approval or disapproval of executive compensation packages.

Regardless how one feels about the issue, it is an employee relations problem in many companies if only because demoralized and angry employees are not engaged employees. It appears the three remaining Presidential candidates see the current system of executive compensation as fatally flawed and all express an intent to deal with the issue if and when they take the top office.


Anonymous David Gillis said...

Jim... Mark Cuban put a post up on this same issue recently... Check it out at: http://www.blogmaverick.com/2008/04/15/my-2-cents-on-ceo-pay/

2:29 PM  

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