Putting the Brakes on Executive Compensation and Expenses

Originally Published in The Bay Observer, October 2016.

“159 to 1 is pay ratio of top CEOs to the average worker” ran the September 16, 2016 headline in the business section of the National Post. In the 1960s the average pay of CEOs was about 25 times that of a production employee according to Montreal business weekly LesAffaires.

Compensation for executives of publicly listed corporations has been subject to disclosure for some time. New rules in the United States now require disclosure of the CEO-employee pay ratios. Similar rules do not exist in Canada. For public bodies, the sunshine list has been informing the taxpayers on the use of their dollars for a number of years. However the $100,000 threshold was set some 20 years ago and likely should be adjusted for an inflation element so that the list provides better highlights.

But are Boards keeping compensation in check? We have heard some interesting stories over the years. A few years ago there was a great gasp when the multi-million pay packet and perks for the Home Depot CEO came to light while Home Depot was suffering weak financial performance. The CEO did not share in the pain with the owners. This is one of the reasons “say on pay” by shareholders became a force.

An interesting aspect is the difference in compensation between the CEO and his/her direct reports. Should a CEO earn twice as much as those who are reporting to him/her? Is the CEO really worth twice as much as the person who is overseeing all the operating activities? For example, is the CEO of a hospital worth 50% more than the vice president of nursing?

I also find it interesting how a new person coming into a CEO position gets paid more than the retiring CEO. Why would a green first time CEO get paid more than a fully matured and performing CEO who held the post for 10 years? Is this the Board doing its job? Unfortunately what we see is reliance on “survey says.” In consulting with Boards for years, I have seen a misuse of “survey says.” One issue is that Boards don’t understand that the survey is quoting compensation for CEO’s who have been in the position for years and are performing well. I have also seen Board use comparators that are not really comparators – not equivalent in terms of size of organization, complexity, or demands of the position. Sometimes the clubiness of the Board means that the CEO gets a nice compensation package and he is left to set compensation for his direct reports. Those direct reports then look after their direct reports, but the vast majority of the staff are grouped as the “employees” and are looking at only a cost of living adjustment. But when the books have to be balanced, it is the front line employees who are cut back rather than reducing some of the bureaucracy and freeing up compensation for a multiple front line staff in place of one executive. If the goal is truly client or patient care, then don’t cut the front line.

Here is an example from a member based organization. The CEO’s salary plus bonus plus benefits was $930,000; the Chief Financial Officer came in at $485,000, the Chief Information Officer came in at $440,000. Is the CEO worth twice as much as his next in line? Many Boards struggle at doing robust performance reviews for the CEO and many struggle at containing the compensation packages. One client commented to me lately that finding a CEO was easy, but finding a talented chief information officer was the challenge.  So in the case above, looks like the talented resource is the one who is under paid. But if the CIO is bumped, does that automatically bump the CEO?

Often the best way for a CEO to give himself a pay increase is to increase the pay for his direct reports. The CEO then expects the Board to follow his lead when it comes to adjusting the CEO’s pay. The Boards which I work with retain authority over the salary ranges for the CEO’s direct reports in order to try to rein in the domino effect.

Then there is the abuse of the expense account. I had to deal with a case where the CEO, while already receiving a monthly car allowance, was also claiming reimbursement for mileage and his car insurance. I had another case where I was called in by a CFO to deal with a CEO who tried claiming 25% more than the allowed moving allowance. The Board Chair was nervous about not approving the expense reports as the CEO might have gotten upset. Really? This is the CEO you don’t want.

Fay Booker is the president of Booker & Associates, a consulting firm focused on promoting excellence in corporate governance, risk management and operational effectiveness. www.BookerandAssociates.com 

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