| BUSINESSWEEK ONLINE : APRIL 19, 1999 ISSUE | ||||||||
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| COVER STORY
What Keeps the Pay Merry-Go-Round Whirling Where are all the superstars? One reason for skyrocketing CEO pay is the perceived talent shortage. Top talent has gotten harder to find in a global environment. Says George H. Conrades, head of the compensation committee at CBS Corp.: ''One of the biggest challenges in business...is the [lack of] top-flight management talent.'' No one knows this more than executives, who use that leverage--and the threat to seek greener pastures--to push the pay envelope. As a result, the fear of losing a good executive weighs more heavily in setting CEO pay than performance standards: For every performance clause in a contract today, there's a special ''retention bonus'' to offset it. Says Robin A. Ferricone of pay advisors SCA Consulting: ''There's a real tug-of-war between retention and pay for performance.'' LOW RISK. But is the cupboard really so bare? A closer look suggests not. Most baby boomers are currently in their 40s--the typical time to gun for the CEO chair. Women, minorities, and foreign execs are now legitimate contenders for the corner office. Meanwhile, mergers are shrinking the number of CEO slots. And after hitting a peak in 1996, the number of CEO searches fell 14% in 1997 and rose just 2% in 1998, according to the Association of Executive Search Consultants. ''There isn't really that large a shortage of qualified professionals,'' says consultant James A. Reda of Arthur Andersen & Co. So where does the problem lie? Often, with the board. In a volatile market, companies can see their stock plummet if they pick an unknown name. That can lead a risk-averse board to go after a candidate that won't ruffle feathers. Well-known, proven candidates tend to bring with them gigantic pay demands, however, leaving committees feeling they must pay up. ''We tend to drive toward the conclusion that the entire industry has nine talented people,'' says Meyer Feldberg, dean of Columbia Business School and director of the compensation committee at Federated Department Stores. ''It becomes a self-fulfilling prophecy.'' One example: When George M.C. Fisher got the nod at Eastman Kodak Co. (EK), the stock moved up nearly five points in a day, creating $1 billion in shareholder value. But his inability to spark a comeback has left the stock anemic. Yet Fisher still has an outsize pay packet that includes millions of stock options and restricted stock grants. Like almost all execs, his deal contains a zinger: a guarantee that should things not work out, he'll collect big-time anyway. Says John R. Walter, the former AT&T president who took home a $31 million severance package after nine turbulent months: ''Any executive that has a proven track record, when he goes into a new situation, he probably wants a great deal of security. It's just a normal reaction.'' Just because boards feel unable to stop the pay merry-go-round does not mean they don't bear some responsibility for it--especially if they don't help a company develop internal talent. ''What influences pay more than anything,'' says Donald S. Perkins, former CEO of Jewel Cos. and head of the comp committee at Aon Corp., are ''companies that do not develop their successors.'' Moreover, consultant Reda argues, companies have more leverage than they think they do (table). It's up to them to showcase the opportunities they offer--without giving away the store, too. By Jennifer Reingold in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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