Bonuses are back.
The Wall Street Journal is reporting that a study by the consulting firm Hay Group shows that CEO bonuses at 50 major corporations jumped by a median of 30.5 percent, the largest gain in at least three years. The study looks at some of the first pay disclosures of the annual proxy season, which is about to get underway.
In a year that had record corporate profits and saw a broad rise in stock prices, it’s not surprising that bonuses are getting a boost. Disney CEO Bob Iger, for instance, will see one of the year’s biggest bonuses--a $13.5 million payment that equals a 45.4 percent increase from the year before, the Journal reports. Disney’s total shareholder return, meanwhile, was up 24 percent, higher than the overall market. Meanwhile, some CEOs are getting less as their companies’ performance declines. Monsanto’s Hugh Grant, the Journal reports, didn’t get a bonus at all after the company missed financial goals.
Executive pay specialists and CEOs are likely to point to these numbers with pride—our pay systems are working, thank you very much, so there’s no need for more regulation. (All public companies this year with a stock market value of more than $75 million will be required to give shareholders the chance to vote on executive pay.) Profits and stocks are up, they’ll say, and the CEOs who got us here deserve to be rewarded, lest we lose them to other firms.
Many in the public, meanwhile, are likely to cry foul. You can hear the pitchforks clanging now: Profits may be up, but many CEOs are getting rewarded while they’re doing little to create jobs. Even shareholders who are happy to reward CEOs for a job well done might spew their coffee over Starbucks CEO Howard Schultz’s venti $3.5 million bonus, more than three times the $1 million he received the year before. (A company spokesperson told the Journal that the company's profit more than doubled to record levels, and that Schultz’s bonus goals were “tied to a very challenging fiscal 2010 annual operating plan.” Total shareholder return for Starbucks was up 25 percent last year.)
What’s missing in this debate, I think, is something much bigger. Fine-tuning a pay-for-performance system, in which it’s okay for CEOs to get massive payouts when the company performs well but little to nothing when it performs poorly, only serves to reinforce the idea that the CEO is on a different plane from everyone else. It bolsters the argument that the CEO’s contribution to the company is so outsized, and so essential, that we must pay him or her extraordinarily well when things go well, but (at least at some companies) exact penalties when things don’t.
To me, truly good leaders—and good boards—would recognize that while CEOs work hard and are responsible for decisions that affect many employees and investors, their contribution is not so overwhelming that they should be paid hundreds or even thousands of times the average worker. Famed management expert Peter Drucker liked to say that a pay ratio of 20 to 1, or even 25 to 1, was essential for fostering teamwork; much more than that and midlevel managers become “incredibly disillusioned.” The chief executive is essential to the fortunes of the company, but so is the scientist in the lab who developed the blockbuster drug, the marketing whiz who dreamed up a brilliant ad campaign, and the low-level manager who keeps his budget on target while inspiring his team to do more with less.
In other words, the debate over executive pay has become all about the tactics of getting it under control, rather than the substance of whether it should be so high in the first place. On Monday, a government review of executive pay report in Britain was published, which proposed that companies disclose the pay gap between the CEO and average workers. While I’m not a fan of regulations that would limit that gap, I do think requiring companies to disclose those numbers is a very intriguing idea. It might go a long way in steering the conversation away from whether $10 million or $15 million is an appropriate bonus, given the company’s performance, and instead toward whether a $10 million payout is really appropriate to the CEO’s contribution in the first place.