The title of this post is a shot across the bow of Red Bird since he and I go toe-to-toe on this topic. I am a strong proponent of letting the market determine executive pay. I trust the market as the best arbitrator of compensation. The principle works every time it is tried – if the executive is overpaid, he or she will be dismissed. If they are underpaid, he or she will receive an increase. Seems fair to me.
I realize I am oversimplifying the issue, but I want to make a point. It does not bother me that the head of Exxon received a $400 million comp package. Good for him and the record profits that he led during his tenure. I suspect there are few Exxon shareholders who are upset by their most recent earnings. If they are disgusted by his compensation, sell the stock. Beautiful how the market works, isn’t it?
CareerJournal.com offers this article – Limits on Executive Pay Are Easy to Set, but Hard to Keep. The article’s focus is on Whole Foods’ capped executive plan. The article is an interesting read:
Other companies have had mixed success in limiting executive pay. Ice-cream maker Ben & Jerry’s dropped its pay cap in 1994 when it hired an outside CEO to replace co-founder Ben Cohen. Office-furniture maker Herman Miller Inc. eliminated its salary cap in 1996, as the company faced trouble recruiting top managers. James Sinegal, CEO of Costco Wholesale Corp., has for years voluntarily capped his salary at $350,000, although the company says it doesn’t track the ratio of executive-to-worker pay.
The one piece of data that gets my ire up is the executive-to-worker ratio. It doesn’t matter. Certain positions pay more than other positions based on the market’s demand and the value of the position as perceived by the company. If this ratio is truly significant, why don’t we see college president-to-non-tenured professor ratios or chief of surgery-to-nurse ratios? Are these statistics not as significant in the overall scheme of compensation?
Here is the crux of the cap problem:
Last year, as sales hit $5.6 billion and rivals tried to poach Whole Foods managers, the board of directors raised the cap to 19 times average pay, or $607,800. The increase was needed “to help ensure the retention of our key leadership,” Chief Executive John Mackey wrote in a Nov. 2 message to employees. Mr. Mackey said every top executive, except him, had been repeatedly approached by search firms seeking to lure them to rivals.
If companies want to install such caps, more power to them. I think if you read the article, you’ll see many companies that found the principle to be well-meaning in theory but of little use in practice.