Executive Pay Rising, But More "Shareholder Friendly." Huh?

Posted by: Jena McGregor on August 21, 2008

There must be something about summer and surveys. My inbox has been filling up with them even more than usual. Particularly frequent in recent weeks have been studies on executive compensation. Yesterday, Watson Wyatt sent me a press release with the headline “Companies Making Executive Pay Programs More Shareholder Friendly.” Little news there. And an email from the independent (and always helpful) pay consultant Frank Glassner happily points to a Financial Week story detailing an Equilar analysis that says 39% of companies are now using independent pay consultants, up from 35% in 2007. That’s not surprising either, given all the attention paid in Congress to the issue of conflicted human resources consultants, who are hired to set the pay for the very executives who pay the bills on the firms’ other consulting work.

Perhaps most interesting is a press release sent to me by ExecuNet, a network for C-level executives. It says that a survey of 1,098 business leaders shows that executive compensation increased 5.7% during the last year, and is expected to grow an additional 6.2% during the next twelve months. The most interesting number in the release, pulled from yet another survey of search firms and recruiters: The rate of guaranteed severance, according to the survey, went up 19%, from 37% in 2007 to 44% in 2008. If the first survey from ExecuNet is true (and valid—I’m not so sure about surveying executives about their salaries), one has to wonder a little about studies like the one from Watson Wyatt, given the state of the economy and the slipping performance at many corporations today. It’s not exactly shareholder friendly to have average executive pay and benefits increasing when many companies are struggling.

Finally, in other executive pay news, Oracle’s already lavishly rich CEO Larry Ellison nabbed the top spot on AP’s list of highest-paid CEOs. One that caught my attention was #10, Glenn Murphy, CEO of struggling retailer Gap.

Reader Comments

Tim Bartl

August 22, 2008 6:24 PM

In her August 21, 2008 blog, Ms. McGregor questions whether pay for performance is becoming more aligned based on data developed by ExecuNet, which is an executive recruiting site, showing pay and severance increasing. Other data shows executive pay was flat in 2007. According to Equilar, Inc., an independent provider of executive compensation data, in 2007, among S&P 500 companies total shareholder return increased by 7.4 percent, but compensation increased by just 1.3 percent. In other words, there was alignment between pay and performance.

Meanwhile, large companies are working through the Center On Executive Compensation (www.execcomp.org) to develop a more performance-based approach to severance. This approach recognizes that severance provides a useful bridge when a new chief executive is recruited to a company in case things don’t work out in the first couple of years. After that, however, the Center believes that additional severance should be based on the performance of the company under the executive’s watch.

Eileen Luttrell

August 24, 2008 4:07 AM

I can really appreciate this post. It hits the nail on the head as far as the great divide between the CEO's and the rest of the company. It is a disgrace that a CEO would get paid such huge salaries and severance packages when they have run their companies into the ground.

It also sets a really bad example to the employees of such companies. These practices basically say that there is no personal responsiblity for one's actions and you don't have to perform to be rewarded.

Also think about how many people get laid off when a company doesn't perform well. For instance, how many people have been laid off from Sprint Nextel to cut costs? This while the former CEO, Gary Forsee, gets a severance of more than $80,000 per month? How does this make sense economically or ethically?

bill

August 24, 2008 1:01 PM

CEO pay packages are contributing to their short tenures. People think: you're taking all the money, you do the work.

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