Burden of Proof
September 1 1997 by JP Donlon
Are CEOs overpaid, underpaid or get- ting what they deserve? Answer: all of the above. In this issue CE tackles the nettlesome issue of big boss compensation. “Capital Ideas” columnist Sally Pipes reckons it’s time CEOs stood up and defended themselves as a group in terms of the economic value created. “Speaking Out” columnist Bob Lear points out that the “indecent” compensation of some CEOs is actually payback from risks foisted on them by critics. In our 11th annual analysis of CEO compensation, beginning on page 38, Jack Lederer and Carl Weinberg look at 222 companies where 199 have had the same CEO in place for at least four years. Over the last decade, our analysis shows, CEO pay has become better aligned with performance-but, Lederer and Weinberg assert, that’s not the real issue anymore.
If shareholder value is the standard by which CEOs and their boards are to be judged, then it is incumbent on them to expose top management to the same risks shareholders face-and to share the wealth with those who helped create it in the first place. Are the CEO and his team the only value creators? If not, how far down the ranks should one go to ensure proper participation? It depends. Each organization is different, as are the industries in which they operate. The table on this page offers a glimpse at which firms lead and which lag behind in offering stock option grants below the top officer level. The most striking thing about the list is the fact that all the leading wealth sharers are, perhaps not coincidentally, also market leaders-companies most people would be proud to work for.
Does this mean that if a company doesn’t offer 96 percent of its option grants below the level of the top officers, it is a laggard? Not necessarily. But it should prompt a burden-of-proof test for the Compensation Committee. A pharmaceutical company that doesn’t spread its options as widely as a Pfizer or Merck, which figure among the leaders, should ask itself, “Is our balance correct? Are we rewarding all our wealth creators?”
Interestingly, not all CEOs are getting fat raises these days. Fifty-nine of the 199 CEOs in the group represent companies whose CEO total cash compensation stayed the same or declined. Twenty-two had CEOs whose cash compensation was down by 20 percent or more. Compensation committees, write Lederer and Weinberg, are becoming much more vigilant. “The days when CEOs would try to manipulate them by controlling the information are pretty much over,” they write. “Few are willing to roll over and play dead.”