Gus Carlson is a U.S.-based columnist for Tausi Insider.
Along with crowded gyms, empty bars and full flights to warm destinations, the new year brings the annual gripe-fest about CEO compensation.
It’s a familiar chorus in the media, the same story that runs year after year: No one person can really be worth that many millions. The pay gap between the C-suite and the work force is too wide – and getting wider. The perceived lack of fairness is summed up in sensationally naive metrics about how, on the first annual working day, the average chief executive makes more money over breakfast than the average worker makes in a year.
But the problem isn’t that chief executives are getting paid too much. The enormous responsibilities they assume, especially those who run public companies, go well beyond their job descriptions. When those “big moments” require smart decision-making and swift action, the chief executive, like a baseball relief pitcher, stands alone. There may be no “I” in team, but when a crisis hits, there is no team in the eye of the stakeholder – only the chief executive.
The real issue lies with boards of directors that appoint chief executives and don’t make sure their choices deserve what they get. Boards need to do a much better job of holding chief executives accountable for performance, using the multifaceted compensation structures to spur good performance and punish failure, and axing leaders if they underdeliver.
Too often, boards ride their chief executive ponies too long by tolerating and not correcting their missteps. Of course, there is some ego involved on the part of the board. No one wants to see their choices fail. And human nature favours second chances, especially in humans such as highly paid directors with deep business experience.
There is also a continuity concern. The average shelf-life of a chief executive is already short enough at about three years. To axe a chief executive even sooner can be hugely distracting and demoralizing to an organization. A corner office with a revolving door sends a negative message to stakeholders, internal and external.
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Boards also often fail to use compensation packages effectively. Most chief executives have complicated pay structures, comprised of salaries, cash bonuses, stock bonuses and other perks. Boards can turn the dial on any one of those components – or a combination – to reward good performance or spank subpar results. In practice, boards are quick to pay out when times are good, but slow to claw back when things turn sour.
Boards also need to do a better job vetting chief executive candidates. Chief executives tend to come from within the ranks of their companies, the logic being someone who knows the company will be able to hit the ground running and won’t have a steep learning curve. But that’s not always a smart play, especially in companies wrestling with transition in fast-changing markets, when a fresh set of eyes in the hot seat would be an asset. Boards, however, often opt for internal candidates who are “good enough” to avoid the ramp-up a newbie needs.
Look at the Walt Disney Co. Recently dethroned chief executive Bob Chapek was homegrown and cultivated by the board. In fact, he was hand-picked by his predecessor, Bob Iger, as the man who could make Disney a leader in the highly competitive streaming business.
Very quickly into his two-year term, Mr. Chapek stumbled. He restructured the company, surrounded himself with bankers, marginalized the creatives and set a strategy that was off course. He also became embroiled in very public external political fights that were un-Disney.
Most critical, he fumbled the streaming ball. The service lost money, then more money. And the strategy to get it back on track was full of holes. Yet the board, including Mr. Iger, approved his actions.
Mr. Chapek’s shortcomings became apparent long before he was fired. Even Mr. Iger became critical of his protegee. Yet it took the chief financial officer to blow the whistle on him and urge directors to act.
Aside from embarrassment, the business impact is real. Disney is already behind its competitors in the streaming business, and Mr. Iger, who has returned as chief executive, will need more time to rebuild it.
The Disney experience is a cautionary tale for those quick to jump on chief-executive pay as evil and a wake-up call for boards in managing the C-Suite. As short as Mr. Chapek’s tenure was, it should have been shorter. And Disney’s board knew it. Mr. Chapek’s salary was not the issue.