May 29, 2017 "The collective delusion of CEO overpay": Today I found this article by Harvey Schachter in the Globe and Mail:
Steven Clifford thinks CEO pay at large companies is outrageous.
Boards are throwing away money in an act of collective delusion, overpaying chief executive officers for reasons that don’t make any sense.
Most people would agree with him. “Corporate directors are the only sentient group who think that CEO pay levels today are justified,” he says. But where he stands out is that he is a member of that tribe – a retired CEO and active board member at three companies. Yet, as he started to look into the matter he decided current practice is crazy and took dead aim in a new book, The CEO Pay Machine.
Some time around the 1980s, that pay machine started. There are advisers to boards – Mr. Clifford calls them “the consulting mafia” – with metrics and analyses supporting the current system, with its large bonus payouts. Board members are supposed to be hard-headed and skeptical. But there is safety in numbers – if every other company is buying into the CEO Pay Machine, he says in an interview, why should you dissent? And there is no upside to questioning the system. That will just anger the CEO and compensation committee.
Since the system took hold, Mr. Clifford notes, CEO pay has skyrocketed and economic growth rates have gone down. He doesn’t think that’s accidental, since the system overvalues the CEO; undervalues everyone else, reducing morale and productivity; and focuses the CEO on short-term actions to increase his stock options rather than long-term growth for the company. As one example, share buybacks are the rage these days. A company interested in growing for the future will invest money in research and innovation.
A CEO interested in his remuneration – aware that the average CEO lasts less than five years at Fortune 500 companies – knows that when he buys back shares, that can immediately increase earnings per share and thus goose the stock and his bonus.
A CEO interested in his remuneration – aware that the average CEO lasts less than five years at Fortune 500 companies – knows that when he buys back shares, that can immediately increase earnings per share and thus goose the stock and his bonus.
He lists these delusions boards succumb to:
The importance delusion: The CEO is thought to be primarily responsible for the performance of the company, so if the company does well the CEO should get most of the credit and rewards. But the CEO is not the corporation. Mr. Clifford figures a CEO may be responsible for 10 per cent of the performance, the high end of research estimates, and thus a different CEO might manage a few percentage points more or less growth. “Most of a CEO’s success is blind luck, being in the right place at the right time, or fit, having the skills needed now,” he says.
The market delusion: There’s supposedly a competitive market for CEOs, driven by supply and demand – high compensation reflects the low supply of good CEOs and the large number of companies bidding for them. In fact, bidding is rare and most CEOs come up the ranks in their own company, so a more fitting compensation would focus on internal equity and comparisons to other levels in the firm hierarchy. A CEO is not like LeBron James, able to shift to another basketball team and carry it to the championship. Usually the training and skills fit only a certain company or industry.
The motivation delusion: Bonuses are supposedly the best way to motivate CEOs to do their jobs. But CEOs should want to do a good job because that’s the way they are wired. Studies show financial incentives work only for simple tasks. For CEOs, incentives are unnecessary if not counterproductive.
The performance delusion: Corporate boards can supposedly measure and reward CEO performance effectively. But Mr. Clifford insists they actually can’t – business is too complex and random. However, knowing the goals, the CEO can skew performance to hit the numbers, not always in the company’s real interest.
The alignment delusion: Stock options and measurable bonus goals align the interests of the CEOs and shareholders. But CEOs only have an upside – they cash in if stock goes up but don’t see their fortunes plunge down as can happen for shareholders. “They aren’t aligned at all,” he says.
Mr. Clifford recommends keeping CEO compensation to salary and restricted stock – stock that might only become available in chunks over a five-year period and that they can only cash in on retirement. But he figures boards won’t do that, so governments must act: For every dollar a company pays a CEO over $6-million, it should pay $1 in tax.
It can still pay the CEO $40million but then owes the government $34-million.
It’s a radical proposal, but he insists “there is absolutely no justification for today’s CEO pay in America and it hurts the economy and the companies.”
The Ladder: Jim Estill: Today I found this in the Globe and Mail:
Jim Estill is owner and chief executive officer of Danby, an appliance company based in Guelph, Ont. He helped more than 50 Syrian refugee families settle in Canada, sponsoring them with $1.5-million of his own money and assembling a team of 800 volunteers.
As a kid growing up in Woodstock, Ont., I had a snow-shoveling business. I had a few contracts [with neighbours] to shovel their driveways. I’d set my alarm for 4:30 a.m. on nights we thought it would snow so I could get all my driveways done and then knock on doors and get the ones who didn’t have a contract. I started a painting business when I was about 14 and it was after I had some success [with that] that I decided my only passion was to run my own business.
I started selling computers because I wanted to design circuit boards. I was studying systems design engineering at the University of Waterloo. At that time, computers were very expensive and I figured out that I got a better deal if I bought two and then sold one. I basically went for the dealer discount so I could buy wholesale, but in order to do that I had to sell some product. As I got bigger and bigger, I had to scale it, so I hired some people, I rented an office. Part of what helped [me] scale was the advent of computer stores – I became one of the sources selling to computer stores when they started coming out.
I sold my company to Synnex Corporation [an information-technology supply-chain services company] in 2004 and part of the deal was that I would be CEO of Synnex Canada. Six months later, I thought this was the worst decision I ever made. When I was running my business, I’d say, ‘We should buy this building,’ and we would buy the building. But I’d go to Synnex and say, ‘Let’s buy that building,’ and they’d say, ‘No.’ I went to one of my mentors and he said, ‘The problem is, you’re not selling to Synnex.’
I’d been selling all my life – you go in, you make the pitch, if you don’t make the sale, you say, ‘How can I make the sale?’ It always energizes me to figure out how to do it.
So I changed my psychology – I deliberately set out to figure out how could I sell head office. I studied it and built a plan and we went from $800-million to $2-billion in five years, which is awesome.
I retired from Synnex, moved to New York and ran an early-stage venture fund for five years. My dad got sick, so I moved quickly back to Guelph where he lived, started a little search-engine-optimization company within walking distance from my home. I thought it would be my retirement business.
I sat on the board of Danby, and when the CEO resigned, I thought, I can run Danby. I’ve had experience running a $400-million company. Then the family that owned [Danby] said they want to sell the business and so I bought it. Retirement is overrated.
I decided to sponsor Syrian refugees because I consider myself to be a humanitarian. One of the things I’ve always said over the years in my business is, ‘Do the right thing.’ I’ve been repeating do the right thing for 25 years, so to see something like [the situation in Syria] and not do anything, I had to do the right thing. It became part of me.
I planned to bring in 250 people, thought I’ll do my little bit. Now I’ve changed my goal – I want to inspire more people to do what I’m doing.
I believe in failure. Fail often, fail fast, fail cheap. I’ve probably had more failures than anyone else, but the key is to keep them small enough. I’d be doing four things at once, one of the them would kick in and do well, and people would think, Jim’s a genius. What they forgot is three of them fell on the floor and didn’t work.
My advice for young entrepreneurs is, think big, execute small. The media has glorified business into thinking it’s an invention game. It’s not an invention game. You drive through Toronto and Mississauga and you will see 98 per cent of the businesses doing things that their neighbour is doing, but they’re doing tiny little things a bit better than their neighbour.
It’s not Dragon’s Den. You can make money in virtually any business as long as you execute a little bit better than the other company.
It’s not Dragon’s Den. You can make money in virtually any business as long as you execute a little bit better than the other company.
As told to Shelley White. This story was edited and condensed.
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