Category Archives: compensation

Paying CEOs to Fail

Scott MacDonald thinks the contract language and hiring processes for chief executive officers need to change. As he sees it, some CEOs are great leaders who deserve their seemingly extravagant salaries, but others are highly paid despite their poor performance. And even when they’re fired, they don’t lose out because they’re given a golden parachute — millions of dollars for failing, he says.

In some back-and-forth with me recently about this, MacDonald — former CEO at the Australian company Investa, who wrote a book about his experience there, Saving Investa: How An Ex-Factory Worker Helped Save One of Australia’s Iconic Companies (here’s his website’s information about the book and here’s the Amazon link) — said this to me:

“Every year, we read stories of corporate boards of directors firing a senior executive for unsatisfactory performance and then paying the executive millions of dollars upon his or her departure.

“Several years ago, for example, the Walt Disney Co. hired Michael Ovitz [as president] and then terminated him 14 months later. Ovitz reportedly received a severance package of $140 million. Recently, Wells Fargo admitted that thousands of their employees opened new accounts in customers’ names without consent to generate bigger fees and commissions. The scandal has damaged the bank and led to many investigations and potential fines. The person in charge of the retail division where the scandal occurred announced her retirement and reportedly received about $125 million upon her departure.”

MacDonald says the real problem stems from the narrow definition of “cause” in current CEO’s employment contracts; specifically, the clause that says the executive may be fired “for cause,” in which case nothing more is owed to him or her.

But the definition of cause is still limited to being found guilty of felony acts, committing fraud or stealing from the company. It almost never includes poor performance.

MacDonald’s had a successful career as a CEO turning around struggling companies, often by addressing performance issues. Through his years of experience, he says,

” … the benefits gained from changing personnel have always outweighed the short-term financial cost … . Once, I fired a talented chief financial officer because he was not a team player, typically promoting himself while disparaging other team members. The cost of his termination was significant because being a bad team member was not defined in his “for cause” contract definition, but the entire company performed much better after his departure.”

So how did “cause” become so narrowly defined and almost unenforceable? It’s unclear, MacDonald says, but he has a theory, based on the past 40 years of business as usual, and it even includes human resources. Here’s how he lays it out:

“Generally, a board retains an employment consultant to help negotiate the contract or provide an opinion that the contract is fair and competitive in the industry. The same consultant will often seek to see human resource-related consulting services to CEOs in the future. If a consultant recommends approval of a CEO’s favorable employment contract, the consultant is more likely to be favorably considered when that CEO approves hiring an HR consultant.

“After one board agrees to a narrow definition of ’cause,’ it quickly becomes cited by other executives and their attorneys as the standard. … When an executive is terminated for poor performance but not ‘for cause’ … he or she is typically entitled to all the compensation and benefits that he or she would have received if he or she had not been terminated. This usually includes salary not yet paid, bonuses not yet earned, stock options not yet vested and various other entitlements. If a terminated executive has three years left on a contract, the company often has to pay three years of full compensation as if the executive had been a stellar executive.”

So what can we do to turn this around? Simple. According to MacDonald, just broaden the definition of “cause.” Successive years underperforming [against] a pier group of companies should be cause for termination. And if a dispute occurs over the performance measures, submit it to an arbitration panel for resolution.

Other items we might consider cause for dismissal could include successive poor results on confidential employee surveys, failure to meet budget targets in successive years, failure to follow written directives from the board … his list goes on.

Companies that provide audit services to another company are generally not permitted to provide other consulting services to avoid influencing the impartiality of the audit. Similarly, says MacDonald, “companies that provide employment-contract services could be forbidden from providing other consulting services to the company involved.”

Finally, he says, when an employee is terminated without cause, he or she should not be paid full bonuses for all the remaining years of their contract. “Clearly,” he says, “the bonuses would not be earned.”

Googlers Pass on Massive Payouts

Can you have too much of a good thing?

A handful of Googlers working on the company’s self-driving car project seem to think so.

The Mountain View, Calif.-based tech giant’s car unit—which in December 2016 spun off into a standalone business known as Waymo—has seen staffers exiting in noteworthy numbers, and walking away from potentially huge paydays in the process, as Bloomberg reports this week.

The unit “has been a talent sieve” for at least the past year, according to Bloomberg, “thanks to leadership changes, strategy doubts, new start-up dreams and rivals luring self-driving technology experts.”

But the business’s “unusual compensation system that awarded supersized payouts based on the project’s value” has helped contribute to its retention struggles, notes Bloomberg. “By late 2015, the numbers were so big that several veteran members didn’t need the job security anymore, making them more open to other opportunities, according to people familiar with the situation. Two people called it ‘F-you money.’ ”

Indeed, “a large multiplier” was applied to compensation packages toward the end of that year, “resulting in multimillion-dollar payments in some cases,” Bloomberg reports, adding that one member of the team had a multiplier of 16 applied to bonuses and equity amassed over four years, for example.

The same article points out that the system was revamped when the autonomous car unit morphed into Waymo late last year, and replaced with a more uniform pay structure that treats all employees equally. By that time, however, “the original program got so costly that a top executive at parent Alphabet Inc. highlighted it last year to explain a jump in expenses.

“The payouts contributed to a talent exodus at a time when the company was trying to turn the project into a real business,” the article continues, “and emerging rivals were recruiting heavily.”

Part of the issue at Waymo “was that payouts snowballed after key milestones were reached, even though the ultimate goal of the project—fully autonomous vehicles provided to the public through commercial services—remained years away.”

While reports have underscored rumblings within the car division, ranging from questions surrounding the unit’s leadership and strategy to engineers’ designs on starting their own self-driving vehicle companies, “the big payouts exacerbated the [turnover] situation because team members had less financial incentive to stay,” according to Bloomberg.

Ironic, isn’t it, that the company would start losing talent by paying them too much? When was the last time your organization had this problem? If there’s a lesson here for HR and compensation professionals, it might be that over-the-top rewards might end up having unintended consequences, and that massive lumps of cash don’t necessarily guarantee employee loyalty.

Commander-in-Chief or CEO?

From Truman to Trump, a handful of U.S. presidents have made their way to the Oval Office via the business sector.

If a recent Korn Ferry Institute survey offers any clues, it might be a while before we see another commander-in-chief who’s taken that route.

In a poll of 1,432 corporate executives, an overwhelming majority of respondents showed no signs of aspiring to the highest political office in the land. Given the choice, 85 percent of executives said they would rather be CEO of their own organization than lead the country, according to Korn Ferry.

While recognizing the similar requirements for both roles—the ability to drive growth, manage crises, think strategically and manage finances, for example—most business leaders allow that the president has even more hats to wear.

Indeed, 81 percent of the executives polled said they think the U.S. president has a more complex job than they do.

“In a way, you could consider the U.S. president [to be] the national CEO,” says Rick Lash, senior partner at Korn Ferry Hay Group, in a press release summarizing the findings. “While serving as a corporate CEO is generally considered a very challenging role, executives acknowledge the U.S. president faces hurdles that are much higher than those faced by a leader in corporate America.”

In addition to complexity, you can put compensation on the list of reasons why your CEO isn’t likely interested in leading the free world.

Seventy-one percent of executives, for example, reported feeling that the U.S. president—at $400,000 annually, as determined by Congress—is underpaid. Nearly half (48 percent) said the president should receive at least $10.4 million per year; the current average compensation for a CEO at an S&P 500 company. And exactly 0 percent cited salary/compensation as the top reason someone would want the job of U.S. president. But money, or a lack thereof, isn’t the only thing deterring executives from someday pursuing a presidential run.

The position of U.S. president “comes with extra scrutiny as well,” according to Korn Ferry.

Donald Trump, for example, “has been president for less than a week and he’s been questioned about his every action, from the serious (the words he used during his inaugural speech and his choice of cabinet members) to the silly (whether the dance with his wife, Melania, at an inaugural ball was ‘awkward’),” notes the aforementioned release.

“A corporate CEO may be questioned on his or her firm’s stock price and business strategy, but usually isn’t scrutinized for dancing ability.”

Philly Bans Salary Questions

Philadelphia, well known as this country’s Cradle of Liberty, may soon become known as a Grave of Salary Questions.

According to this Associated Press report, Philadelphia has joined other cities and municipalities that have banned employers from asking potential hires to provide their salary history, a move supporters say is a step toward closing the wage gap between men and women.

(The story notes that similar salary history bans have been introduced in New Jersey, and the city councils of New York City and Pittsburgh as well as the District of Columbia. In November, New York City stopped asking applicants for municipal jobs what they currently earn, and earlier this month Democratic New York Gov. Andrew Cuomo signed an executive order banning state entities from asking about pay history. Democrat Eleanor Holmes Norton, the District of Columbia’s delegate to Congress, has sponsored similar legislation in Congress.)

Mayor Jim Kenney (Democrat) signed the measure on Monday, and said he’s confident the bill can withstand legal challenges, likely led by Philadelphia-based Comcast.

“I know that Comcast and the business community are committed to ending wage discrimination, and I’m hopeful that moving forward we can have a better partnership on this and other issues of concern to business owners and their employees,” he said. “This doesn’t need to be an either/or argument — what is good for the people of Philadelphia is good for business, too.”

However, the report notes, Comcast and the Chamber of Commerce see the bill as yet another roadblock to Philadelphia-based businesses:

“The wage equity ordinance as written is an overly broad impediment to businesses seeking to grow their workforce in the City of Philadelphia,” Rob Wonderling, president and CEO of the Philadelphia Chamber of Commerce, wrote in an opinion piece to a city business journal this month, adding it “infringes upon an employer’s ability to gain important information during the hiring process.”

Comcast had urged the mayor to veto the bill or face legal challenges, according to a legal memo obtained by The Philadelphia Inquirer earlier this month. The memo said the law would violate employers’ First Amendment rights to ask potential hires about their salary history.

Comcast referred questions to the Chamber of Commerce for AP’s story.

 

 

Pay Equity for Lower Ranks Only

We’ve been focusing, along with the rest of the media, on gender pay equity and wage gaps for some time now. (Witness searches on  this HRE Daily site and our magazine website, HREOnline.com, alone.)

But this latest study from the Academy of Management that’s going into the February issue of the Academy of Management Journal shows something we’ve never reported on: the fact that women managers foster pay equity between the genders, but only for low-ranking employees.

The study, based on actual manager-subordinate reporting relationships in 120 branches of a large U.S. bank, takes into account two different approaches to combatting pay inequity. One consists of pay formalization, which seeks to minimize personal biases by mandating the use of detailed written rules to determine compensation. The other, less formalized approach, looks to the increasing number of female managers in the workforce, and the power they wield to set pay.

According to an email I received on the study:

“… both formalized and less formalized approaches to pay equity come into play in each locale, with employee annual bonuses being awarded on a highly formalized basis but branch managers, almost half of them women, having considerable leeway in determining employees’ base salaries. Thus, [researchers had] a rare opportunity to compare the efficacy of formalized and less formalized approaches in achieving pay equity between men and women workers — specifically, how this is affected by manager gender.

“Unsurprisingly, the paper finds little or no gender gap in the formalized segment of pay — that is, in the amount of annual bonuses, standards for which are spelled out in detail by the company. In contrast, there was significant gender inequality in the less formalized component of pay, base salaries, which constituted the lion’s share of compensation, with greater imbalance occurring on average under male managers than under women.”

Yet, in the words of the study,

“Concluding that female managers redress inequality is incomplete because once organizational level is taken into account, it becomes evident that female managers only reduce inequality for employees at the lowest-level organizational position of teller.”

So … as the study paints it, controlling for a host of relevant factors, female tellers in branches headed by women had base salaries that were about the same as those of male tellers; yet, female tellers in branches headed by men had base salaries about 7.5 percent less than male tellers.

In sharp contrast, women’s wages for all other positions ranged from 4 percent to 13 percent less than those of men holding the same job, regardless of whether the branch was headed by a man or a woman.

What accounts for the fact that women branch managers eliminated the gender pay gap for female tellers but not for higher-status female employees? Does this confirm the “queen bee” effect, which contends that women who have been successful in male-dominated contexts try to keep other women from getting ahead? Mabel Abraham of the Columbia University Business School, the study’s researcher and author, answered this for me:

“Any suggestion that this is a queen-bee phenomenon would be purely speculative. It just as likely is a matter of women showing an extra measurer of concern for lower-income workers. The value of the research lies elsewhere — in highlighting a nuanced approach for organizations in striving for gender pay equity.”

What are employers and their HR leaders supposed to do with this new information? In Abraham’s opinion:

“In order to develop appropriate strategies for reducing gender pay inequality, organizations must concurrently consider the potential role of both female managers and the level of the employee they oversee.”

Millennials Earn Less Than Boomers

As if young workers weren’t already  feeling  cursed on this Friday the 13th, here is more fodder for the Millennial Misery file (via the Associated Press and USA Today):

With a median household income of $40,581, millennials earn 20 percent less than boomers did at the same stage of life, despite being better educated, according to a new analysis of Federal Reserve data by the advocacy group Young Invincibles.

According to USA Today’s piece, the analysis of the Fed data shows the extent of the decline in outlook for millennials. It compared 25 to 34 year-olds in 2013, the most recent year available, to the same age group in 1989 after adjusting for inflation.

While education does help boost incomes, the median college-educated millennial with student debt is only earning slightly more than a baby boomer without a degree did in 1989.

The home ownership rate for this age group dipped to 43 percent from 46 percent in 1989, although the rate has improved for millennials with a college degree relative to boomers.

The median net worth of millennials is $10,090, 56 percent less than it was for boomers.

The analysis, the story notes, fits into a broader pattern of diminished opportunity.

Research last year by economists led by Stanford University’s Raj Chetty found that people born in 1950 had a 79 percent chance of making more money than their parents. That figure steadily slipped over the past several decades, such that those born in 1980 had just a 50 percent chance of out-earning their parents.

What’s even more troubling, though, is that the millennial malaise could be a portent of more economic worries:

The declining fortunes of millennials could impact boomers who are retired or on the cusp of retirement. Payroll taxes from millennials helps to finance the Social Security and Medicare benefits that many boomers receive — programs that Trump has said won’t be subject to spending cuts. And those same boomers will need younger generations to buy their homes and invest in the financial markets to protect their own savings.

“The challenges that young adults face today could forecast the challenges that we see down the road,” said Tom Allison, deputy policy and research director at Young Invincibles.

Gaming the Gainsharing System

This is just a guess, but I’m going to say the mood throughout Whole Foods break rooms is less than festive this holiday season.

And if the claims made in a new lawsuit prove to be true, you couldn’t really blame the grocery store chain’s employees for not getting into the spirit this year.

Last week, one current and one former employee from a Whole Foods store in Washington, D.C. filed a federal class-action lawsuit claiming the Austin, Texas-based company “engaged in a nationwide scheme to strip hard-working employees of earned bonuses in order to maximize [its] own profit.”

More specifically, plaintiffs Michael Molock and Randal Kuczor assert that a group of managers gamed Whole Foods’ gainsharing program to avoid paying automatic bonuses to departments that came in under budget for the year, as reported by the Washington Post.

According to the lawsuit, the gainsharing program is intended to enable employees in such departments to share in surpluses. The plaintiffs claim, however, that Whole Foods avoided paying by shifting labor costs to other departments without properly accounting for it, as well as by creating “fast teams” comprised of employees who float from one department to another.

The complaint also alleges that company executives knew of the “illicit practice of shifting costs,” which the suit says has impacted as many as 20,000 past and present Whole Foods employees.

In a statement, Whole Foods acknowledges that some sort of bonus program manipulation took place, while maintaining that it was confined to a relatively small number of its stores. Nevertheless, Whole Foods says it is investigating the matter. And, as the Post reports, the organization has already terminated the nine managers known to have been involved.

The plaintiffs are asking for more than to see a few managers fired. The suit seeks $200 million in punitive damages and triple unpaid wages, among other relief, according to the Post.

“Defendants intentionally manipulated the program and illicitly engaged in a nationwide corporate practice of ‘shifting labor costs’ in order to pad its profits,” the suit claims, alleging that this “unlawful” maneuvering effectively wiped out surpluses in certain departments, “thereby robbing hard-working employees of earned bonuses.”

Holiday Bonuses Up This Year

the best gift- money. Gifts on wooden background.The holidays will bring a little extra cheer for many workers this season, with two thirds (66 percent) of companies planning to award year-end bonuses and gifts, according to a survey from Challenger, Gray & Christmas. That’s up from 50 percent from Challenger’s 2015 holiday bonus survey.

Another survey, this one from recruiting firm Accounting Principles, finds that 75 percent of companies will award bonuses this year. Thirteen percent of companies will provide bonuses of between $1 and $99, 37 percent  between $100 and $499, 21 percent will provide between $500 and $899, and 29 percent will be awarding their lucky employees $1,000 or more.

Credit the steadily improving economy for the rise in bonuses, says Challenger, Gray & Christmas CEO John Challenger. “As [the economy] continues to improve, employers will have to rely increasingly on bonuses and other perks to hold onto valuable employees,” he said in a statement.

Full results of the Challenger survey below:

Does your company award year-end/holiday bonus, perks or gifts to employees? (Check all that apply)

2016 2015
Yes, we provide a non-monetary gift to all employees (such as gift basket or extra vacation day). 14.8% 6.3%
Yes, we award a nominal ($100 or less) monetary award to all employees (cash or gift certificate). 11.1% 12.5%
We award a monetary bonus to all employees, the size of which is determined by the company’s overall performance throughout the year. 18.5% 18.8%
We award a performance-based year-end bonus to selected employees, the amount of which is determined by individual’s contribution to departmental and/or company-wide objectives. 22.2% 37.5%
No, we do not award any type of year-end/holiday monetary or non-monetary bonus/perk/gift. 29.6% 43.8%
No, we have awarded year-end/holiday bonuses in the past, but we will not be doing so this year due to the economy. 0.0% 0.0%
Other 3.7% 6.3%

 

If your company does award year-end/holiday bonus, perks or gifts to employees, please describe how this year’s distribution differs from last year.

2016
The monetary value of the year-end bonus will increase. 18.2%
The monetary value of the year-end bonus will decrease. 9.1%
The monetary value of the year-end bonus will be about the same as last year. 72.7%
We are reinstituting year-end bonus/perk/gift after one or more years of not offering such awards. 0.0%

 

Source: Challenger, Gray & Christmas, Inc. ©

A Surcharge on CEO Pay

In case you missed it, the city council in Portland, Ore., voted last week to impose a surtax on companies whose chief executives earn more than 100 times the median pay of their rank-and-file workers beginning next year.

According to the New York Times piece, the legislation is ground-breaking:

The surcharge, which Portland officials said is the first in the nation linked to chief executives’ pay, would be added to the city’s business tax for those companies that exceed the pay threshold. Currently, roughly 550 companies that generate significant income on sales in Portland pay the business tax.

According to the Times piece, companies must pay an additional 10 percent in taxes if their chief executives receive compensation greater than 100 times the median pay of all their employees, and organizations with pay ratios greater than 250 times the median will face a 25 percent surcharge.

This new surcharge comes along just as companies are preparing to comply with the Security and Exchange Commission’s pay-ratio disclosure rules under the Dodd-Frank Act.

“Portland’s effort to impose pay ratio penalties would raise new issues for public companies already working to comply with the SEC’s pay ratio disclosure rules,” said Mike Stevens, a partner in Alston & Bird’s employee benefits and executive compensation group, shortly before the Portland City Council voted on the matter.

“As companies look to address the mechanics of the pay-ratio rules and prepare early disclosure models,” he said, “it’s important to understand that the SEC has given companies broad leeway in calculating these ratios. If Portland or other jurisdictions decide they are going to impose a penalty based on ratios, we  can expect that companies will take a hard look at the available alternatives and likely will become more aggressive with their method of calculation.”

 

 

Benchmarking and Executive Comp

Executive-pay packages often don’t include a comparison of company performance and its competitors are regularly approved by boards of directors, and many have wondered why.

New research by University of Michigan professor Martin Schmalz and co-authors Miguel Anton and Mireia Gine of the IESE Business School and Florian Ederer of the Yale School of Management helps explain why—and why benchmarking happens more in some industries than in others.

They found that when companies in an industry are owned by the same shareholders, the executives tend to be rewarded relatively more for industry performance and less for their own company’s performance.

“Many people have been puzzled why shareholders approve pay packages that lead to high pay without much benchmarking,” said Schmalz, the NBD Bancorp Assistant Professor of Business Administration and an assistant professor of finance. “But it’s actually not that puzzling once you analyze these shareholders’ economic incentives.”

Schmalz, Anton, Ederer and Gine examined 20 years’ worth of data from ExecuComp, which measures the compensation of top executives of the largest 2,000 U.S. companies.

The more a company’s institutional shareholders own big stakes in rival companies, the less pay managers receive for company performance and the more pay they receive in response to rivals’ performance.

The logic is easy to understand, the author contends:

If you benchmark performance against rival companies, that gives managers an incentive to compete aggressively. If you own a number of companies in the same industry, you don’t want that to happen,” Schmalz said. “If anything, you want them to cooperate more, because you want to improve the value of your entire portfolio, not just one company. Our findings suggest managerial contracts give managers economic reasons to act in their shareholders’ interests—it’s as simple as that.