Countering CEO Disengagement in the Age of TARP

Organizations are wrestling with a strange duality: the need to rethink high CEO compensation while trying to keep chief execs engaged

By Rebecca Reisner

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Tell members of the general public that 1) CEO compensation is likely to decline in the near future; and 2) this drop may compromise the self-esteem and morale of these chief executives, and most would reply 1) it's about time; and 2) who cares?

But for corporate HR officers and boards, it is something to worry about. According to a new study from the Corporate Executive Board, human resources officers are deeply concerned that the increased scrutiny CEO pay packages will receive—as well as actual cuts in compensation levels—will cause CEOs to become disengaged and even more likely to quit, imperiling the organizations that need their vision and confidence to make them strong despite a weakened economy.

"A lot of leadership teams are thinking about what to do to retain their senior leaders," says Jean Martin, director of the human resources practice at the Corporate Executive Board (CEB), an organization in Arlington, Va., that provides research and support for executives. The 2009 CEB study, Executive Compensation, found that the percentage of senior leaders who demonstrate high levels of discretionary effort (defined as the willingness to go above and beyond normal duties) dropped from 29% in 2006 to 13% for the second half of 2008.

At the same time, the CEB is seeing "100% of organizations visiting whether CEO pay is deserved," a tenuous situation because compensation is more crucial to senior executives' engagement than it is to that of lower-level employees, according to Martin.

Another problem: Many CEOs already have stock options under water.

With many organizations set to reexamining the metrics used to determine CEO compensation, and with the turmoil over executive compensation in general, it's definitely enough to be of concern to CEOs, says Pearl Meyer, the senior managing director at Steven Hall & Partners, an executive compensation consulting firm based in New York City, who adds that "I don't necessarily think executive pay will decrease significantly."

Ken Blanchard disagrees. "I think it's almost an ethical imperative that CEO compensation come down," says Blanchard, the author of numerous management books, including the classic The One-Minute Manager. "In the old days, the rule was CEO compensation was five times that of the lowest-paid employee." Even by the $500,000 minimum TARP standards, the formula isn't relevant today.

Regardless of whether the threat to CEO pay is grounded in reality or overhyped speculation, human resources officers and board members should be on the lookout for CEO disengagement and learn what they can do to remedy it, according to Meyer.

The signs of CEO disengagement are fairly easy to identify, says Neil Jacobs, head of Northeast America for YSC, a global business psychology consulting firm in New York.

When Thick Skin Becomes Thin

"Body language tells you what mode your CEO is in," says Jacobs. "Look at posture and whether the CEO sounds defeated in meetings." Indeed, CEOs who seem uncharacteristically scared or oversensitive to criticism may be heading for a disengagement crisis. "People who manage to graduate to CEO level are pretty thick-skinned," says Roy Cohen, a career counselor and executive coach in Manhattan. "They tend to be confident. They believe in themselves and that they deserve to be in the CEO role. If they don't [act that way], there's been a breakdown."

You may notice the CEO seems psychologically disconnected as a team member. When CEOs become disengaged, "the shift of their leadership starts to move to leading more for themselves than for the organization," says Jacobs. "Engaged CEOs will use the word 'we' a lot. They show honesty and responsibility. They'll say, 'I'm the head of this organization, and we're going to get through this.'"