It came as no surprise when, just last week, the US Securities and Exchange Commission (SEC) voted to require all publicly traded companies to disclose the ratio between executive pay and the median pay of employees.
Out of control executive compensation has been a top-of-mind issue for corporate America ever since the subprime mortgage collapse plunged the globe into recession. The bigger surprise, and concern, was the way some folks reacted to the SEC’s recent disclosure provisions.
The Boston Globe flagged comments made by David Gallagher, one of two Republican-leaning commissioners on the SEC. Gallagher called the new disclosure rules “social policy masquerading as disclosure requirements.” David Hirschmann, senior vice president of the US Chamber of Commerce, alleged the new rules were nothing more than “a favor to union lobbyists who misguidedly think it will help their organizing efforts.”
It is absolutely true that organized labor in the US has been pushing for more disclosure provisions in a bid to shame senior executives into curbing their pay, bonuses and benefits. And there is an argument to be made for a bit of curbing.
Again, the Boston Globe cited a study from the Economic Policy Institute showing that in 1978, the average CEO earned about 30 times the average worker; today, the ratio is 300 to 1, more than ten times what it was 37 years ago.
This is an issue I have written about in the past. More and more leaders I talk to now are being asked to defend their paychecks. And in many instances, they are failing. The fact is far too many leaders have a pretty inflated sense of what they are worth to their organizations.
It’s pretty clear that for a very long time, senior business leaders believed that exorbitant pay and bonuses came with the job. This sense of entitlement led many to feel that they didn’t need to justify their compensation. But the world is changing for CEOs.
As I see it, this isn’t just an economic issue. This is just one of a myriad of flaws in the mindset of many business leaders.
In the end, the environment in which CEOs lead is more complex than a generation ago. The pressure to perform is very high, and as a result I think we can all appreciate the need for more generous compensation relative to other employees. The core question we really have to answer is – how generous?
That question is very hard to answer when executives and business community opinion leaders are railing against efforts to improve disclosure of pay and bonuses. Rather than spending time defending secrecy and a lack of transparency, perhaps business leaders could focus on making sure their paychecks are fully and completely defensible.
The good news is there are some progressive CEOs taking this approach. I wrote in the past about Costco CEO Craig Jeilinek taking a two-prong approach to leveling the paycheck playing field: he pays industry-leading wages to his employees, while keeping his own remuneration among the lowest for big retailer CEOs.
Others are following suit. Earlier this year, several executives at Jeffries, an international investment bank, refused multimillion-dollar bonuses to reflect, in part, a year of mixed financial results.
These leaders are truly accountable and taking this issue in their own hands.
Again, this is not a debate about whether CEOs and other executives deserve to be the best-paid people in their organizations. They bear greater burdens, and deserve to be paid accordingly. The key word here is “accordingly.” That means executive paychecks that can be defended based on performance.
This is a time for CEOs to truly step up and be counted on this issue. Don’t wait for others to force you to take action on compensation disclosure. Instead, be an example to others.
Think hard about the impact that you have on your company. Then decide what compensation would be appropriate. Is it defensible in the eyes of your investors, your employees, your customers?
This week’s Gut Check is critically important for all business leaders: do you have an inflated sense of your self worth?