By George M. Keller
Ed. Note: It is not common to get a senior corporate leader to
critique top executive compensation — especially to boldly admit that CEOs
are overpaid. George M. Keller did so in Directors & Boards in an
article he authored in 1994. By then he had retired as chairman and chief
executive officer of Chevron Corp. His legacy included executing the largest
corporate takeover at the time — the acquisition of Gulf Oil Co. in 1984, a
deal that transformed Standard Oil Company of California, which he had
joined in 1948, into Chevron Corp. Keller died in October 2008 at the age of
84. Following is an excerpt from his remarkably candid — and prescient —
article, as pertinent to today’s situation as when it first appeared 15
years ago. At the time of the article’s publication, he was a director of
Boeing Co., First Interstate Bancorp, McKesson Corp., Metropolitan Life
Insurance Co., and Chronicle Publishing Co., and served as chairman of four
compensation committees. — James Kristie
American corporate CEOs, in general, are significantly
overpaid. Their job responsibilities and risks just do not justify
Let me hasten to acknowledge that I was a beneficiary of a
good part of the inflation of the CEO’s income before retiring at the end of
In the past 40 years we’ve seen the introduction of modest
10% or 20% management incentive plans in the 1950s expand in scale and
participation through the ’70s, and supplemented by longer-term schemes in
the ’80s — stock options, restricted stock, performance shares — all
incremental to normal salary progress, often adding 200% or more to salary.
Working for Their Grandchildren
Today’s typical corporate compensation profile looks like
a pyramid with the Eiffel Tower poking out the top — the CEO and one or two
other executive officers far above the madding crowd. At present
compensation levels, most CEOs are working to generate funds for their
grandchildren, their favorite philanthropies, and the IRS.
Of course, the board compensation committee is aware of
the widening gap between the CEO and the rest of his organization. Practical
economic considerations preclude our moving toward a more equitable
relationship by simply doubling the lower-level salaries, so we pursue a
sort of pseudo-equity by trying to restrain further expansion of the gap and
by relating the CEO’s compensation more closely to his success in generating
value for the business as a whole.
We are faced with the need to be competitive — whatever
that means — in order to hire and retain qualified executives and to reward
success. The question is: Competitive with whom? Movie stars? The Cubs’
second baseman? Or the true entrepreneur, the inventor, the creator, who
bets his skills, imagination, and assets against long odds?
I think not! Generally speaking, these cases have few
parallels in the typical career-based companies that make up the bulk of the
Fortune 500. Yet, within these companies the so-called “market” analogy has
spawned a self-fulfilling prophecy of increased compensation.
Data on peer CEOs is available in proxy statements, if one
can decipher them, or numerous consultants stand ready to show you that your
CEO is in the third or fourth quartile when his total compensation is ranked
with his corporate neighbors, thus propagating the ratchet effect in which
CEO salaries steadily leapfrog one another upward, ever upward.
But if I believe CEOs are paid more than the job is worth,
how do I propose to do something about it? I don’t. At least as far as total
target compensation is concerned. That doesn’t mean there’s no way to slow
down the freight train — make that the gravy train!
An Interviewer’s Question
I was asked at one time in a TV interview if, during my
last year as chairman, I was overpaid. My answer: If you rephrase the
question and ask if I would have worked just as hard at my job for much
less, I would say “definitely yes.”
But my senior managers and I would have been seriously
embarrassed, as industry competitors with whom we dealt on a continuing
basis wondered how come my board thought my job (or I, as CEO)
was worth only half as much as my peers. I call this the “scoreboard
effect,” and I view it as a particularly difficult impediment for
compensation committees to deal with.
I believe the key objective of the committee should be
“pay efficiency.” Assuming an agreed target for a total CEO compensation,
and a salary component as modest as reasonable, this means that the larger
part of compensation should be performance-related, primarily to his
contribution to “corporate value.”
Use of the term “corporate value” rather than “shareholder
value” follows my strong personal conviction that the appraisal of corporate
achievement includes far more than stock price and dividend payout. Integral
to its very existence and critical to its long-term success are a
corporation’s employees, customers, and community.
Wall Street is a volatile short-term dealer in the shares
of our corporation — an essential component in the ultimate value judgment
we must make on performance. But much more significant than the stock market
snapshots are steps taken to build value for the longer term.
Also, to be meaningful, our appraisal criteria must be
hand-tailored to this corporation — to its strategic vision, physical
and financial resources, competitive environment — and the criteria must be
measurable to an acceptable degree.
The CEO as ‘Strategic Broker’
Committee members must recognize that to a large extent
senior executives in the ’90s, rather than controlling organizations, are
continually engaged in managing ideas. Ideally, the reward system should
reflect how well these executives play the role of strategic broker — not
always an easy factor to measure.
We find it simpler to relate a senior executive to
measurable elements of company performance than that executive finds it
possible to seriously influence these elements. Even for the CEO there are
many factors more related to the economy, the marketplace for his products
and services, and the resources presently available than his manipulation,
where possible, of those factors.
We must recognize that the compensation of corporate
leaders is not solely of interest to executives, boards, and compensation
specialists. There is a much wider constituency — our American society —
which is not only beginning to take notice but seems ready to react
politically to the growing chasm between rich and poor.
There are signs every day that many in our country have
abandoned the American Dream of a better life and, partly in consequence,
are withdrawing into enclaves of special interest. This despair of progress
and the new separatism it seems to have engendered is corrosive to the very
concept of a democratic society.
Ripples Far Beyond the Boardroom
And, surely, it can only hasten the decline of the dream
if the American people watch those at the top of the pyramid continue to
pull away from all the rest.
All this is simply to suggest that the issue of executive
compensation is one that sends ripples far beyond the boardroom. Words like
“equity” and “restraint” touch upon a wider community of interests than
those immediately connected to the corporation.
Some form of
special leadership is called for here, because in this matter — as in many
others — we discover that an issue of corporate responsibility is an issue
of social responsibility as well.
This “In Memoriam” tribute to George Keller was published in
the First Quarter 2009 edition of Directors &
Boards. Photo reproduced with permission of Chevron Corp.