“All I Want Is What’s Coming to Me.” – Sally Brown, Peanuts
A few weeks ago, an article in The Economist touched the third rail of American capitalism: it stated that CEO pay in America was “out of whack.” It even justified its headline by starting off with a quote by the current patron saint of American Capitalism—Warren Buffett.
Of course The Economist backed up this blasphemous claim with several quantitative studies. This compensation consultant had to swallow extra hard because the article not only featured compensation consultants, but found compensation consultants from some of the largest firms that admitted to their culpability in the exorbitant rise of CEO pay.
But, after 25 years in compensation consulting, I knew these inequities of pay did not just happen. I knew of missing variables that influenced the regression line that these authors were desperately trying to draw.
We must go back in time. In one of my first labor economic courses, the professor drew a diagram on the board. The graph and the curves represented a person’s productivity curve intersecting with their compensation curve over time. This graph demonstrated a key concept in labor economics: the back loading of wages. Longevity with a firm was commonplace, and pensions were the reward for such service. Executives were rewarded on the way out with the gold watch, and a lifetime of some earnings held back and now delivered in the form of a defined benefit plan, aka a pension.
Then, almost 30 years ago, pensions began to disappear. The key retention tool for CEOs became Long-Term Incentives (LTIs). But “long term” was a relative term, and generally such incentives were only held back three to five years. Like a 401(k), these “long term” rewards were portable once exercised. The retention value was limited.
So not only was lifetime employment gone, so was the incentives for it. How would companies recruit and retain top executives? The competition for top talent became more intense, higher wages were demanded. The quarterly call for greater shareholder value shortened the execution runway for executives, further pressing wage demands higher. Do better; earn more. However, the data shows the correlation between pay and performance is weak, if non-existent.
Companies need to acknowledge that the long journey from the days of back-loaded wages to today’s “obscene” incentive packages for executives has had little influence on company performance. Perhaps that guy down the hall with the 30 year pin was the missing variable all along. Read More Here
“If you do not change, you can become extinct!” – Spencer Johnson, Who Moved My Cheese?
Twenty years ago, I had a manager who said that my job in Human Resources would be replaced by a machine one day, but that would be a good thing. I failed to see how that was encouraging.
Over those twenty years, however, I have seen the benefits of technology in my line of work, in affording me the time to think more strategically by spending less time on tactical work. Technological innovation has brought immeasurable societal gain but has often been faced with the fear of self-preservation. If a machine can do my job faster, cheaper, AND better, what will become of ME?
We have all been asked to pivot in nearly all aspects of life lately by moving to online platforms. For example, I love my virtual workout classes that don’t involve a commute or listening to people grunt. COVID-19 has made it obvious that we rely on technology more than we ever have. The New York Times has reported that most middle-class jobs demand some technological proficiency. As of May, half of US workers were working remotely (previously 15%) and automation in many fields has steadily been on the rise.
Workers now need more advanced skills to survive, particularly in a time when unemployment numbers are steadily increasing. Even Congress has recognized how important this is and worked in a bipartisan fashion to draft the Skills Renewal Act, which would provide up to $4K in tax credits to newly unemployed workers seeking training in high-demand areas. Managerial and other strategic roles are always far harder to replace with technology. It’s a perfect time to “upskill” and get around to the training you have neglected, instead of binging the next Netflix series.
The best part about upskilling is that usually many of these skills, if not most, are portable—you can take them from job to job. Just like I take my free weights from my living room to the patio sometimes…sans grunting.
During this time of Coronavirus, we’re all finding ourselves forced into spots we wouldn’t necessarily choose for ourselves. Given the option, many of us would rather exercise at the health club, work down the hall from our colleagues, and enjoy dinner out with friends. However, when we’re given clear guidelines to steer our behavior, we adjust—yoga and a 7-minute workout at home, zoom meetings and excel spreadsheets at the dining room table, and baking extravaganzas at home. It takes forethought and planning, but for the most part, we’ve successfully adjusted our daily routines. (Or maybe you’ve discovered that without a plan, it all falls apart and the day ends feeling like an unproductive loss!)
This article, posted on the Harvard Law School Forum on Corporate Governance, reminds us that the same holds true in our work lives. We don’t know exactly what the future will hold, but by planning now, and putting some guidelines around Executive Compensation, you won’t need to end the year feeling like your incentive program was a loss. Read More Here