During the last few months, there have been a number of articles in the news about leaders and their compensation. In March, I did a post about an article that showed statistics stating that CEO compensation increase for new CEOs had only increased by 1.5% in 2011 compared to 11% in 2010. This was significantly down from past years even though their performance had improved and the performance of the company had improved.
I did a post about Carmelo Anthony because he was paid a high salary to help the New York Knicks become a top team and win a championship. The organization has not been as successful as expected since he joined the team and they have paid him a very high salary for results.
Once again there was an article in the news about compensation and performance. The Wall Street Journal article CEOs That Delivered The Most And Least Bang For The Buck by Joann S. Lublin and Dana Mattioli stated, “A Wall Street Journal analysis of compensation data for 300 top U.S. companies assembled by Hay Group found that while pay generally tracked performance last year, some CEOs delivered far more bang for the buck when it came to shareholder returns.”
The article went on to explain that although the results discussed in the March article showed that in many cases the compensation during the last year was equilivalent to performance, there were also companies that didn’t follow suit with compensation based on performance. The article explained the stories of four CEOs that were significantly underpaid or overpaid. The graphic above shows some of the statistics related to the performance and compensation based on the CEO.
So how should the CEO be compensated? Shouldn’t compensation equal the performance? If they do well, they should get paid well, whereas, if they do poorly they shouldn’t receive nearly as much compensation, right? Well there are a lot more factors to be considered than just that. So what other factors should you consider?
Risk – Reward Model
From a leader’s perspective, you must have an adequate amount of reward if you are to take on a high risk. This is very applicable to leader’s and their compensation. In most, if not all cases, the leaders that become CEOs have a proven track record of success within their organization. They have done a great job in the past and have held prestigious positions with more security. In order for them to take a position of leadership as the CEO, they must receive a high compensation. No leader would be willing to take on a high risk if there wasn’t a high reward that went along with it.
When CEOs have such a high risk, there is a chance that they will underperform. They can’t, however, always turn around the companies they are expected to turn around. By the same token, sometimes leaders are able to turn around an organization but it takes more time than just a few months or a year. They may receive a high compensation right from the start with the expectation that they will turn things around. It may take a few years or longer to turn things around. Depending on the board, the CEO may be given that time in which case the company can eventually become successful.
Industry
A couple of the CEOs mentioned in the article worked for energy companies, i.e. natural gas and oil refining. These industries tend to be more conservative than other industries. The natural gas industry for example is regulated by the public utilities commission, so in most cases the CEO is not going to get a very high salary even if the company is very successful. On the other hand, CEOs in banking are going to have a higher pay scale because there is a high potential for profit and growth.
Corporation Size
CEOs over very large companies are naturally going to get paid higher salaries because their revenues and profits are generally higher. In smaller companies, the CEOs don’t get as much compensation for their efforts because they don’t have the compensation to give based on the revenues and profit.
The three factors mentioned are only a few factors that lead to the differences in leadership compensation versus performance. What other factors contribute to whether or not CEOs are compensated based on their performance? Do you feel CEOs should receive high compensations? Please share your thoughts in the comments section below!
Leave a Reply