Pay, Performance, Personal Fantasy

All eyes were on Tesla in anticipation of the shareholder vote on the proposed $56 BILLION pay package for CEO Elon Musk. The number is eye popping. Here’s how Tesla board chair Robyn Denholm made the case:

“Fairness and respect require that we honor the collective commitment we made to Elon — a commitment that was, and fundamentally still is, about retaining Elon’s attention and motivating him to focus on achieving astonishing growth for our company…”

How much of Elon's attention would the Board get for half that amount?

In the Modern Principles for Sensible and Effective Pay, the Aspen Institute Business & Society Program, in partnership with Korn Ferry, poses a simple, direct, question. The issues of ‘quantum’ aside, what are companies paying executives to do? If we take Denholm’s words at face value, the answer for the Tesla board is that the crazy pay assures the CEO stays focused on growth, that is, growth in sales, presumably to reach its real goal: continued growth in the stock price.

There will always be outliers when it comes to over-the-top pay. This is America after all. The real problem with a pay package like Elon’s, or more importantly, the growing number of examples north of $100MM, is how it tends to normalize, and then create a ton of room to ramp up, run-of-the-mill elevated pay of executives who earn a fraction of that amount.

The median CEO pay today in large public companies is close to $30MM—or something like 300 to 400 times what the typical worker makes in a year.

This piece in The New York Times reminds us that the CEO-worker pay ratio for big companies was below 20 to one into the 1980s, when management guru, Peter F. Drucker, said it felt “about right” when C.E.O.s received 10 to 12 times what the workers earned. Drucker thought 20 to one would not necessarily destroy “workplace morale and social cohesion” but he wouldnt go higher.

Paying the C.E.O. hundreds of times more than workers earned? That was out of the question then, though as the NYT piece notes, it is now standard practice.

There’s lots of reasons we won’t see the system reverse, none of which have to do with the health of enterprise, unless your definition of performance equates to the return to short-term investors.

Regulation of pay has twice failed us - producing workarounds or unintended consequences. For example, the so-called Say-on-Pay vote by shareholders contributes to the escalation of pay, as we have just witnessed in the case of Tesla. Shareholders always vote 'yes', rarely 'no' on this non-binding vote unless they are impatient with the stock price. Its all about Pay-for-Performance. Disclosure rules embedded in Dodd Frank contribute to pay envy and normalize even higher pay for execs. Boards fear paying the CEO below a standard like '70% of median pay for peers' signals a lack confidence in leadership.

But the current out-of-control system cannot be taken lightly. The heavy dependence on stock in pay packages makes a joke out of "stakeholder management", endorsed by the Business Roundtable in 2019. And run-away executive pay concentrates wealth and is a singular contributor to growing inequality.  

This will not end well. What would it take to change the conversation?

It needs to begin with business leaders.

Here's my fantasy. It starts with a dinner conversation among CEOs and their significant others about whether all of this ratcheting up of executive compensation is really necessary or good for society. The dinner guests would drink high-quality scotch and be reminded that they could still afford every possible luxury making a quarter of their current salaries, and that there’s something bigger at stake here: American values and the health of our democracy.

Twenty to thirty of the most admired CEOs would be recruited into the conversation as it fanned out from the dinner party to breakfast tables in HQ cities. With the right leaders, they would eventually agree to turn back the clock—to establish a different norm that puts the health of the enterprise and its workforce at the center of the conversation. They would instruct their boards that their pay must be reduced in both its complexity and in quantum, and to rethink putting the stock price at the center of the pay system.

As highly admired executives and companies step up, the protocols established would take root and embolden boards across the country to make sensible decisions about pay. Directors would spend their time on human questions—questions about workers and their skill set and talent retention. They would begin to see these concerns as more central to the enterprise than the attention paid to benchmarking made up ‘peer’ groups or finding ways to work around the tax effects of stock rewards or protections if the exec can’t make the number.

These CEOs would go down in history as the pioneers who put their values and corporate culture and yes, equity and social cohesion and the health of Enterprise-America, on the front burner; they would also be known for turning down the heat on pursuit of share value at whatever cost.  

Harrumph.

Well, I did say fantasy. But in pursuit of a better vision of the future, could it become reality?

Judy Samuelson is executive director of the Aspen Institute’s Business and Society Program and author of “The Six New Rules of Business: Creating Real Value in a Changing World.”