Human Resources Issues for Senior Management
Issue link: https://digital.hrreporter.com/i/699912
30/CANADIAN HR STRATEGY COLUMNS P eople don't need to know much about executive com- pensation to have an opinion about CEO pay levels. And the unceasing debate on the subject suggests organizations may be facing increasing pressure to justify the significant — and growing — dollars being spent on executive compensation. Consider new research by Stanford University in California on public perception of CEO pay levels. The 2016 study found Americans aren't really clear about how much chief executive officers actually earn — but they still believe these corporate leaders are paid too much. The research was led by the Rock Center for Corporate Gov- ernance, an initiative of the Stanford Graduate School of Busi- ness (GSB) and Stanford Law School. The results reflect the views of 1,200 Americans, representative by gender, race, age, political affiliation, household income and state residence. Overall, the survey respondents believe CEOs at Fortune 500 companies earn only a fraction of their published compen- sation amounts. A typical respondent believes a CEO earns US$1 million in pay, whereas the median reported compensa- tion for the CEOs is about US$10.3 million. However, 74 per cent of respondents feel CEOs are overpaid relative to the average worker. While responses vary across de- mographic groups, "overall sentiment regarding CEO pay re- mains highly negative," say the researchers. "There is a clear sense among the American public that CEOs are taking home much more in compensation than they deserve," says David Larcker, Stanford GSB professor. "While we find that members of the public are not particu- larly knowledgeable about how much CEOs actually make in annual pay, there is a general sense of outrage fueled in part by the political environment." Corporations and boards need to do a better job explaining and justifying CEO pay arrangements, say the researchers. "This is a warning that companies need to do a better job of justifying CEO pay levels," says Nick Donatiello, lecturer in corporate governance at Stanford GSB. That includes com- municating how much value their CEO creates and how much compensation is required, given the market for talent, to attract and motivate the right people, he notes. Nearly two-thirds (62 per cent) of respondents feel there should be a maximum amount CEOs should be paid relative to the average worker, regardless of the company and its per- formance. Those who favour capping CEO pay say they would do so at a very low multiple, with the typical response being no more than six times that of the average worker. Another key finding was that public opinion varies widely on the degree to which executives should share in the value created at a company. The median respondent feels a CEO should receive only 0.5 per cent of a company's increased value as compensation, while the average response is 3.2 per cent. "This gets to the heart of the issue of pay for performance," says Donatiello. "Either the public is not sold on the idea that the CEOs should share in value creation to the extent that they do. Or they do not believe that CEOs play an important role in value creation." In either case, "companies need to make a stronger case for how pay is tied to performance — to the extent it is," he says. But respondents don't have clear or consistent views about what should be done. About half (49 per cent) feel the govern- ment should do something to change CEO pay practices, while 35 per cent feel the government should not intervene. Given that the compensation levels of employees in general remain fairly stagnant, individuals may also want to see value creation expressed in terms that relate to them. In the face of rising CEO pay levels, some questions that may become in- creasingly top of mind include: • How are employees benefitting from the gains for which CEOs are being rewarded? • What kinds of investments are organizations making in their business and their people? • Are new or better jobs being created? • Ultimately, what is the quid pro quo? These aren't easy questions to answer. But given the current political and business landscape in many countries, such ques- tions are not likely to dissipate any time soon. Claudine Kapel is principal of Kapel and Associates in Toronto, a human resources consulting firm specializing in compensation de- sign, performance management and employee communications. She is also the co-author of The HR Manager's Guide to Total Rewards and Straight Talk on Managing Human Resources. ARE CEOS BEING PAID TOO MUCH? "COMPANIES NEED TO DO A BETTER JOB JUSTIFY- ING CEO PAY LEVELS." Claudine Kapel