Every now and then, when ever people start scrutinizing executive compensation in corporates, there is a thought amongst some section of society, investors and regulatory bodies. The thought points at a need to enforce or enable a cap on executive & CEO compensation. This thought is also echoed by some ex business leaders as well, who have accomplished their bit and have played their game.
Now, personally I am unable to establish a justification, as to why an employer would try to place a cap on executive pay.
Let’s look at some drivers which enables compensation decision for businesses.
Compensation decision from an employers / businesses perspective, for any position is based on:
- the nature of business.
- nature of industry.
- delivery expectations from the job holder. (support to business, direct accountability for top line or bottom line, leadership expectations)
- the talent flow (the quality and pool of talent) available for a particular job.
Compensation decision from an employee’s perspective is based on:
- the nature of business.
- nature of industry.
- delivery expectations from the position.
- potential of growth & wealth creation in the business & the industry.
- available opportunities (the possibilities of getting a well deserved job)
Now, if a business can optimize their manpower spends, and control the compensation benchmarks across the levels with the above variables in consideration, that’s the best that can be done. You also need to look at the variables that drive the aspirations and decisions of a potential employee.
Rather, than planning a cap, on a CEO’s compensation, it makes sense to plan the best that can be done within the above variables. By placing a cap, you may end up not getting a capable CEO or one who can really steer your business to growth at any given phase of your business. If you place a cap on your CEO’s compensation, some one else will pick up the prized talent, or retention over a period would stand as the key issue.
If you look at the factors mentioned above as parameters to be factored in by employers for their compensation decision – one factor that clearly stands out is – “delivery expectations”. In case of CEO’s the delivery expectations could clearly be in form of business growth, revenue growth, profitability, expansion of business etc. It’s very easy to place numbers around the delivery expectations. While planning the compensation, it makes sense that a good chunk of compensation is a factor of key financial deliverables expected from the position. And well, that’s what most global corporations & mature businesses presently do. The percentage of variable or performance linked compensation for top jobs varies from 40 – 60 % of the total compensation in most corporates. If the business does well , the CEO makes money. If the business falters, the CEO pay also takes a hit.
What about high fixed pay, and golden handshake, expensive severance package or expensive exit conditions ?
Now, a business performance or a CEO’s performance is not 100 % in hands of the incumbent running the show. At the top level, it’s easy to falter as you are one who is responsible for any good decision or any bad decision. Apart from your own decisions , there may be external factors that lead to a messed up performance. While negotiating a deal, the top guy looks for his own security and protection. It’s very easy for some strategies to misfire while running a show. Employers, don’t normally have a fixed policy regarding these – they are clearly negotiated before the employment contract is signed. And well, they are also derivatives of some factors we out lined earlier – specially – ” the talent flow (the quality and pool of talent) available for a particular job.
Who says CEO’s are expensive ? Why would you want to place a CAP on CEO’s compensation ? Let there be competition for talent, let there be some excitement in the market ? If ones decision is going to grow or sink a business, they deserve to get rewarded accordingly or face the boot accordingly.
Praveen is the Founder & Principal Consultant of KHEdge, a boutique HR & Business Process Advisory firm. Over last 15 years he has advised & worked with promoters, founders, business leaders, HR leaders in areas of - Business Strategy, HR Strategy, Organisation Design etc.