Page 133 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 119

CEO Pay and Job Security Disconnect
But two things happened beginning in the mid-1980s. First, CEO pay (increasingly tied to the
price of the company stock) started to increase at a much faster rate, while individuals began
losing their jobs through massive cutbacks and downsizing. If that wasn’t enough, some
companies professed the reason the CEO got larger stock options than usual was because
he or she had announced (or successfully completed) a massive downsizing (which meant a
large percentage of the company workforce lost their jobs). Lofty statements of how these
“rightsizings” were creating wealth for the economy by reallocating resources from those with
excess capacity to those with needs for expansion did little to impress the out-of-work worker
or, perhaps even more important to the company, their still-working friends. Many saw the
executive as to blame in the first place for allowing the company to get into a position of too
many employees. Not surprisingly, employees (and ex-employees) were angry that the CEO
apparently prospered at the expense of their jobs. Consistent with this reaction, third-party
representatives, primarily labor unions, are likely to be very vocal. This anger is expressed in
everything from an information page on the Internet, to the introduction of a shareholder
resolution to limit the amount and/or alter the forms of executive compensation, or more
directly, to an organization-wide effort to unionize the company’s workforce.
Executives need to remember that employees have the ability to influence several other
stakeholders every day, including customers, the community, and shareholders. It is ridicu-
lous for executives to talk about a “committed workforce” when, by its own pay actions,
it alienates the employees. Management must take the time to show how executive pay is
tied to company performance. A clear indication that executive compensation is pay for
performance is an important first step in removing employee dissatisfaction over executive
pay. Furthermore, unless management wishes to formalize a “we-they” culture, it will also
go out of its way to answer questions about how executives are paid. A second step would
be to include all (or virtually all) employees in the same type of short- and long-term incen-
tive plans. Admittedly, there will be a major difference in the size of awards (based on job
importance), but at least the employees believe they are participating in the same way.

The Pay Gap
The spread between CEO and lower worker pay (however measured) has been widening and
is commonly referred to as the pay gap. Detractors and proponents both agree that long-term
incentives need to be included in comparing executive and worker pay. However, they cannot
agree on how to calculate such a value. Some express it in absolute terms (i.e., the dollar
difference). High absolute pay is a red flag by itself. For many people, a million dollars is a
career earnings target. Paying that much or more is a point not to dismiss quickly. Others
prefer to express the difference in relative terms (i.e., the percentage difference). This is often
described as the pay multiple. In doing so, one must understand both the numerator and the
denominator. Table 4-4 shows three possible definitions for each. OTE is an abbreviation for
overtime-eligible, those persons who must receive pay for overtime hours under the Fair Labor
Standards Act. Note that multiples range from 2.7 to 25. To make the best case for CEO pay,
compare CEO salary with average pay in the company (a 2.7 multiple). To make the worst case,
use salary-plus-all-incentives compared to the wages of the lowest-paid worker (a 25 multiple).
The relationship becomes even worse if instead of $500,000 the CEO makes $5 million,
moving the multiple to 250. Increase it to $50 million and the multiple skyrockets to 2,500!