Could We Have A Nuanced Discussion On CEO Compensation?

Insofar as almost everything is currently rooted in some form of ideology or belief structure, so too goes CEO pay. I think most people by now realize that the ratio has gotten absurd, i.e. why is a CEO earning $1,189 for every $1 that the janitor makes? It’s a little bit out of whack. But — and this is an important but — if you are a person for whom money is very tied to notions of success, or a person who deeply believes in the free market, or a person who someday would like to have that $1189-$1 ratio (or more) yourself, you will defend CEO pay to the death. It’s true that CEO pay apologists tend to be right-leaning, and they get up in arms when ESG performance is thought to be considered part of a CEO performance evaluation, but honestly, I know some left-leaning dudes who defend CEO and free market stuff to the death too.

So, can we have a nuanced discussion about it? Probably not.

The Securities and Exchange Commission seems broadly toothless minus a few headline-grabbing fines, but here’s a new article and podcast from Wharton about some of their CEO pay disclosure rules.

To wit:

Investors now have a clearer understanding of exactly how much compensation company CEOs realize from equity grants after a regulatory mandate last year required additional disclosures about changes in the value of unvested restricted stock and stock options. The new regulation, referred to as “compensation actually paid” is part of a “Pay Versus Performance” disclosure requirement by the Securities and Exchange Commission (SEC). It gives effect to a provision under the 2010 Dodd-Frank Act that sought to “better align executive compensation with corporate results,” a Wall Street Journal report noted.

This is relevant because about 60–70% of CEO comp is typically tied to stocks, buybacks, and equity. There should be greater transparency around it. What tends to happen is that if a CEO is called out for making too much, he usually says “Well, the company made $1B, and I wasn’t paid anywhere close to that!” — that’s one defense angle — or “I don’t set my own compensation. The Board does that.” When Leslie Stahl tried to get Jamie Dimon on CEO compensation a few years ago, he used both of those moves.

A lot of the psychology of what happens in these discussions is that rich people, or high-earning people, invariably think they’re somewhat better than those just living 1–2 paychecks at a time. They assign characteristics to self around intelligence, grit, hustle, knowing markets, etc. and they assume “Well, if I did it, anyone could do it.” Jamie Dimon himself has testified before Congress and said “Any teller in a Chase bank could become the CEO.” Absolutely everyone knows that’s not true, but the fact that it could be true is enough of an illusion whereby the system can maintain the way the system is.

As for CEO comp, I think it’s a different discussion than senior management comp. A CEO’s comp should entirely be tied to company financial performance and the deals they themselves brought in. That’s basically the whole job. If they bring in billions, they should make $300M or so in a year. I really don’t have a problem with that. They did their job better than anyone, even if the job role itself is kinda dumb for society. Let them have yachts and eat cake. All good. They probably won’t use the yacht anyway — there’s another deal to chase.

Higher senior management comp isn’t as egregious, but it can get pretty bad — and this is where I think we need the initial reckoning on runaway compensation models. A lot of high senior managers are:

• Horribly incompetent
• Not strategic
• Don’t understand the business
• Don’t talk to anyone except 1–2 lackeys all week
• Get down in the weeds on dumb PR initiatives and don’t do anything that drives revenue

Plenty of guys who hit all those bullets make $300,000/year in America. And that’s really bad. That’s where I think there’s frustration around compensation. I don’t care about a CEO getting his nut if he’s flying around trying to fleece rivals on deals and close close close. Maybe that’s his context for fun. But when a high middle manager is getting paid at 10x someone in his department — and the $30,000/year guy probably knows the business better — that’s when things are going off the rails.

I think that’s where I come down — CEO pay is fine, and can be tied to performance of the business. It’s 1–2 levels down from there where we need to really separate the fat from those who actually do stuff, move projects forward, and talk to customers.

What’s your take?