The Advisors' Blog

– Broc Romanek, CompensationStandards.com

A while back, I blogged about this fascinating Stanford/Rock Center survey about how people perceive CEO pay. Surprisingly, the survey got less attention from the mass media than I expected – but there were a number of articles – including this CNBC piece entitled “This CEO got $142 million more than he deserved.” Here’s an excerpt:

The real problem isn’t just lofty dollar figures. As Rosanna Landis Weaver, the lead author of the As You Sow report, details, the more nettlesome issue is the fundamental disconnect between CEO pay and performance: “CEO pay grew an astounding 997 percent over the past 36 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market, disproving the claim that the growth in CEO pay reflects the ‘performance’ of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his pay,” Weaver writes.

A regression analysis conducted by HIP Investor, which rates investments by factoring in environmental, social and governance factors, found 17 CEOs who made at least $20 million more in 2014 than they would have if their pay had been tied to performance. Based on HIP Investor’s calculations, Zaslav, the Discovery Communications chief, made $142 million more than would have been warranted if his pay was more directly linked to performance.

Anyways, as I continue to be fascinated by the original set of survey results about how the public perceives pay (see my blog about it) – check out this second study from Stanford about how CEOs & directors perceive pay. As you can imagine, there are huge gaps between how the public and CEOs/directors perceive pay, including:

– 55% of CEOs and directors believe that CEOs are paid the correct amount relative to the average worker; 29% believe they are not; and 16% have no opinion. In contrast, only 16% of the public believe CEOs are paid the correct amount relative to the average worker, and 74% believe they are not.
– Only 12% of CEOs and directors support a relative limit (compared to the average worker) to CEO pay, while 79% oppose it, compared to 62% of the public favoring a pay cap – with just 28% opposed.
– 34% of directors – compared to 70% of the public – believe that CEO compensation is a problem.
– 97% of CEOs and directors agree that the government should not do anything to change CEO pay practices. In contrast, 49% of the public favors government intervention, and 35% oppose it.

Here’s an excerpt from Cooley’s Cydney Posner’s blog about the second study:

But the disconnect is not limited to the one between the public and directors. Directors also disagree with CEOs about the most appropriate methods of determining CEO comp. For example, while both groups might agree that the extent of value creation is an important element of the equation, they tend to differ on the appropriate method of measuring value creation. According to the paper, directors think total shareholder return (TSR) should be used to measure value creation, while CEOs tend to look instead to profitability measures (such as operating income and free cash flow), which they are more likely to be able to directly influence. In reality, the paper observes, both measures are subject to outside forces, such as broad-market trends, behavioral sentiment or cyclicality.

Which of these measures, the paper asks, is more accurate, and, when measuring performance, are there ways that the board can control for fluctuations in the market and general economy? Would a more effective way of demonstrating “pay for performance” be to “calculate the relation between compensation realized by a CEO over a designated period and value creation during that period…. Would the results of this analysis assuage the controversy over CEO pay or exacerbate it?”