Accountability in any company has to start at the top – in the CEO’s office. Unfortunately, all too often chief executives are paid bloated salaries, which exacerbate the problem of income inequality and are bad for business. It’s time for a change.
In 2012, according to BusinessWeek and the U.S. Bureau of Labor Statistics, the average large-company CEO in America made 354 times what the average worker earned. But it’s not always true that higher management compensation equates to better performance. Nobody personifies this better than Dick Fuld, who was ranked in the top 25 of CEO compensation for eight years before Lehman Brothers filed for bankruptcy.
The SEC recently took a well-intentioned step toward greater transparency by requiring public companies to disclose how total CEO compensation compares to the median compensation of workers at the company. While this rule will hopefully help reduce the growing disparity between worker and executive compensation, it doesn’t go far enough in evaluating a CEO’s performance and whether higher compensation is even merited.
As the managing partner of a clean technology venture capital firm, I know firsthand that investors want a CEO who puts their company and employees first. We want a leader who is willing to sacrifice in order to see the company succeed, and that success benefits everyone. To adopt a phrase made famous by President Kennedy: “a rising tide lifts all boats.”
Higher CEO compensation means less money that can be invested in innovative research and development, new employees, and market expansion. Sky high salaries and bonuses are a disservice to shareholders, employees, and customers.
There are smart ways to link CEO compensation to company performance. When I served on the boards of the California Public Employees Retirement System (CalPERS) and California State Teachers Retirement System (CalSTRS), we recommended using common sense industry standards such as independent compensation committees and shareholder advisory votes. Stock grants provide an incentive for long term company performance if they are linked to indicators such as market expansion, job creation, and gains in market capitalization.
The SEC should now take the additional step of requiring companies to disclose how their CEO’s compensation compares to peer group companies. CalSTRS already considers this information when voting on executive compensation.
I’m all for paying top performers well, but let’s not forget that those top performers aren’t running the company all by themselves. We would do well to have a national discussion on what is a fair ratio between the average employee salary and executive pay. Companies that already adopt best practices have nothing to fear. As we recover from one of the worst recessions in our history, smart companies should proactively do what is best for their bottom line, employees, and shareholders.
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Why does this matter? Because the flip side of inequality is poverty.
The Stanford Center just released a telling report on the state of the nation with respect to inequality and poverty. The summary starts off with “It is difficult not to be struck by the sheer number of indicators … for which the current year is one of very worst over the period we have covered.” That’s academic-ese for “things are really bad.”
Lots more research at http://www.stanford.edu/group/scspi/center_events_sotu.html (disclaimer: I’ve only had a chance to skim the exec summ).