CEO compensation once again made headlines. Equilar, a leading compensation consulting firm released their results of an executive renumeration survey. 2020 was a banner year and the gap during the pandemic widen between CEOs and everybody. Reminded me of management guru Peter Drucker’s warning decades ago of “The Greed Factor.”
Drucker’s mantra was about the need for moderate uniformly corporate compensation. He believed in performance related pay (rewards) for exceptional/outstanding contributions (e.g., innovation) was acceptable, However, he believed a 25:1 after tax differential would be more equitable and lead to the better overall performance of a company, internally and externally. In 2020, the gap between the C-suite ballooned to 274 CEO vs. the median worker compared to 245 times the prior year. On Average CEOs pay increased 14.1 percent in 2020 compared to.9 percent for the median worker. Equitable?
One major pay for performance equity reward is what Drucker labeled “Golden “Handcuff” stock options. Corporate boards establish stock price hurdles predicated on future stock prices and valuation to pump up their CEO’s pay even if they are currently reporting net loses. A good example is a young company with vision of grandeur, Door Dash a food delivery company. Tony Xu its chief executive placed second in the survey at $414 Million. Thanks to the company’s IPO, Tony was rewarded restricted shares of stock despite the fact the company has yet turned a profit ($461 million net loss on reported revenue of $2.9 billion in 2020). What day to day contribution will Tony make to Door Dash’s future long-term success, a company relying on gig workers (“Dashers”) for delivery and the community they service merchants/consumers or are they riding the food-away-from home delivery wave resulting from the pandemic?
Drucker believed that the “community” of a business enterprise is such a valuable thing itself that executive pay should not be allowed to endanger it, through pay structures that are generally considered to be unfair. Again, Drucker argued that executive pay should not exceed 20 to 25 times that of skilled workers. Decades ago, he was warning us about The Big Gap and dangers of self-enriching executives. Bottomline the global corporate compensation culture will continue. Overall, companies will continue to exhibit strong performance thanks to technological advances resulting from the pandemic. In the process, I advocate C-suites should begin to embrace social enterprises for long-term sustainable growth to benefit its employees, members of its supply chain and community.
In my next post I will review my thoughts regarding the future establishment of social enterprises.