So often when those of us that have done time in human resources and accounting look at CEO compensation, we talk about how out of control it is and focus on the firms that are overpaying their top executives.
Last week in a Reuters article, EMC's top executive was highlighted, not as someone who was being overpaid, but as an executive taking a prudent approach to his own compensation and putting the company first.
I honestly think by focusing as much as we do on bad behavior and ignoring the good that we, as followers of companies and technology, create the impression that good practices don't matter. This first week of December, I'd like to give EMC and Joe Tucci big thanks for giving us something positive to talk about in this area. Let's revisit why we have problems in this area, what those problems can do to a company, and what Tucci and EMC did.
The Source of the Problem with Overcompensation
At the source for executive overcompensation are boards largely made up of ex-CEOs who themselves were often overcompensated. This has been portrayed as an old boy's network, and generally that's what it is, because few women get in. These are peers rewarding peers because they can. There are no repercussions to the board for overcompensation and the boards are compensated as well by the company. The board members are effectively selected by the CEO, leading to what can be an ugly cycle of self indulgence. At the core of this, I think, is how weak HR has become over the last four decades after the move for Equal Opportunity Employment. This destroyed efforts for solid results-based compensation and advancement, turning HR into a compliance organization as opposed to one focused on productivity and employee effectiveness. Strangely enough, compensation still seems more focused on what gender you are and who you know than how much you actually contribute. It is at the top of the company where, often, the greatest disparity exists.
There are no built-in provisions to hold these things back and often it takes an event like Enron or WorldCom to focus the country on the problem and do something about it. If extra high compensations resulted in greater success, I doubt we'd have as big a problem with them, but often they lead to excessive practices that can kill a company.
Why Excess Can Be Corporate Death for a Company
As executives compare themselves, not to other CEOs' performance, but to their compensation, focus drops off corporate execution. This can lead to the kinds of issues we had with options over the last couple of years and the suicidal practices like those implemented at Enron that tactically boost executive compensation but put the company at incredibly high risk.
In addition, the more money anyone makes, the more distractions they acquire. They can buy houses, boats and vacation properties, have mistresses, and buy any drug they want. The end result is that they have more to manage outside of their job. Each of these things becomes a distraction in and of itself, and if you look at what often happens to the families and kids, you wouldn't envy them as much as you likely now do.
The end result is often that this excessive compensation leads to a death spiral not only for the company but for the CEO and the CEO's family as well. In short, by almost any measure, overcompensation is stupid. Yet it is so attractive, and incredibly common. This is why what Joe Tucci recently did is such a great example.
EMC Setting the Example
EMC has been doing very well and it isn't unusual for a firm to start granting huge blocks of stock and non-cash-based compensation when this happens. Tucci gets a salary and a bonus, with the bonus being larger and at risk based on the firm's performance. This lessens the entitlement and keeps him focused on improving day-to-day operations. At a later date, he may get a grant based on that performance; some equity is always good because it tends to focus the CEO on strategic direction as well. Too much focus on quarterly results can become a problem.
For a company of EMC's size, a base of $1 million with a bonus of $1.4 million is reasonable and perhaps, assuming EMC continues to perform well, this pullback from the excessiveness of the past will set an example for others that overcompensation does no one any good, not even the executive, and that moderation in all things is a good practice to follow even at the very top of a multi-national corporation.
Disclosure: Enderle Group has an Advisory Relationship with EMC but not on executive compensation.