Too Much Pay Is Never Enough
By DANIEL AKST
To: Board of directors, Ixnay Inc.
From: Herb's Compensation Consultants
Re: Compensation package for your new chief executive
Given the current climate, let me just say how prudent I think it was for the board to retain a firm like ours, with global experience in compensating and incentivizing senior management, to provide a basis for the chief executive's pay package you adopted at last month's meeting.
Unfortunately, the package you created, with a total value next year of $125 million, is way out of line. Based on our extensive research, I have no choice but to recommend a substantial adjustment — upward. You simply cannot recruit and retain a person of the caliber you want for less than $150 million, and, believe me, at this price you'd have yourself a bargain.
I can almost hear the keening of those naïve critics who claim this kind of number is beyond the pale of reason. But they make these unpleasant noises because they don't have the facts. Here they are; please use them at your discretion:
• No one would do the job for less. We've asked around, using our extensive network of contacts among senior executives, and not one would agree to consider your job for a penny less than $150 million, assuming that the position was available. Sure, you can get some bumpkin for less. But in this business, you pay peanuts and you get monkeys. We don't think that it would be prudent for the board to risk your shareholders' investment on a rookie willing to settle into the chief executive's chair for a paltry $125 million or less.
• Paying less provides inadequate incentives. In discussing these matters with senior managers at other large multinational corporations, we find that anything less than what you're paying just doesn't motivate these people. Just a hundred mill? "I find myself falling prey to existential doubts when I'm getting that kind of dough," one confessed. We kid you not — for a really talented manager to get up in the morning, you've got to pay more. Our rule of thumb is this: Spend at least 6,000 or 8,000 times what your lowest-paid employee receives. Otherwise, the chiefs ask, who needs the heartache?
• Loans can help. Despite what the so-called reformers would have you believe, $125 million isn't much in this day and age, especially in New York or California. Heck, a good cup of coffee will run you $5 in these places, and it takes a lot of Joe to keep a chief executive on top of his game during all those meetings and plane flights we put them through. This is to say nothing of suits, lunches or campaign contributions. That's why the chief executives we surveyed found no-interest or low-interest loans of $1 for every $1 of salary to be practically de rigueur for keeping up appearances and remaining stimulated.
• Pile on the options. Chief executives know what a tough business they're in. They know the good times don't last. And they know they're not getting any younger. So what they want more than anything is stock — lots of it. And because Congress doesn't have the gumption to make you take it out of net income, pile it on. This is called "aligning management's interests with those of shareholders," and it's crucial to helping chief executives understand the complicated principle that you're not just in business to make money — that the real goal is to raise the stock price. Otherwise, who knows what kind of silly agenda they might follow?
• Chief executives need to feel valued. The stereotypical chief executive is supposed to be a tough guy, but inside he couldn't be more tender. Thus, one of the biggest pitfalls for many companies bent on saving a few bucks on executive compensation is the chief's self-esteem. Again and again, chiefs told us how important it was for them to feel loved and validated by their boards. "I once worked at a place where my directors tried to get away paying just $75 million," one aggrieved chief said, his voice breaking when he recalled the humiliation. "Now, what does that say about what those directors thought of me?"
Is it any wonder that that company went from a profit position to three straight years of losses culminating in Chapter 11? They had a capable chief executive. They just didn't understand that the way you measure love in this business is with money.
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