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Post Leadership
Posted at 11:27 AM ET, 03/26/2012

A small bump in executive pay? The pros and cons

Spring may have lovely weather, but it also brings its share of headaches, from allergies to tax deadlines. And for the corporate boards of directors who make decisions about executive compensation, it’s the time of year when pay surveys reveal to the world just how much largesse they’ve decided to bestow upon their CEOs.

This year, apparently, they’ve kept their generosity somewhat in check. The Wall Street Journal previewed the findings of its annual survey with the management consulting firm Hay Group, which found that total direct compensation for the 65 CEOs in its study that had been in the job at least two years rose just 1.4 percent last year. That’s a “surprisingly mediocre” result, the Journal says, especially given the relatively significant increases many corporations saw in profits and revenue in 2011.

Two things stood out to me about the survey’s findings. First, the executive pay experts consulted for the article seemed wowed that the directors, on the whole, did not use their discretion to boost pay. Several references were made to directors not giving any leeway for increasing pay, or to directors sticking to a “tougher line” in those instances where a company performed well but did not meet certain goals. While it’s true this may be somewhat unusual (directors have long made exceptions or moved the yardstick on targets set earlier in the year), it’s also disheartening to think we’re still impressed by boards that play by their own rules.

Second, I wonder whether directors are really setting the right metrics if CEOs aren’t seeing boosts in a year when the companies studied saw a median increase in net income of 17 percent and a median increase in sales of 9 percent. That may seem like heresy to say, especially given that CEOs are still making a mint compared with the employees who work for them, and at a time when the income divide is getting wider than ever.

But the whole point of pay-for-performance compensation plans is that executives should do well when their investors do, and should suffer the consequences in kind when they don’t. A 1.4-percent increase in pay, on average, might seem like a healthy turn of events, given how much executives make and the sort of double-digit increases they’ve seen in years past. But if there’s a meager increase in a year that saw 17-percent earnings growth, that could also mean a meager decrease — or worse, increase — in a year with double-digit earnings drops. If that happens, is the system really working?

Of course, these are averages, and there is little question that some corporate leaders did very well in 2011. According to the survey, the median compensation for CEOs in this early cut of the data was still $9.4 million. Apple reported pay for CEO Tim Cook of $378 million, while Viacom’s Philippe Dauman got $42 million. And CEO compensation is still far out of balance with what their employees’ actually take home.

What’s clear is that for most directors, getting executive pay right is harder than it looks. Companies who stick to the metrics set in their pay plans risk choosing yardsticks that don’t accurately represent how investors fare. And while it may seem refreshing to hear about a relatively smaller uptick in executive pay when corporate performance is on the rise, it could also lead to directors being less willing to punish CEOs with decreased pay when performance declines. For the concept of “pay for performance” to work, corporate leaders (and their employees, though that’s a topic for another post) should get an appropriate share in the rewards when things go wel — that way directors can also exact an appropriate toll when things do not.

More from On Leadership:

How to completely destroy an employee’s work life

A love note to the workaholic

How Jim Yong Kim could change the World Bank

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By  |  11:27 AM ET, 03/26/2012

Tags:  business, leadership

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