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Directors & Boards, February 23, 2009 and First Quarter 2009 republication of 1994 article


Directors & Boards


Article of the Week


Slow Down the CEO Gravy Train

Some form of special leadership is called for as those at the top of the pyramid continue to pull away from the rest of the American people.

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 multimillion-dollar compensation.

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 1988.

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. 


Copyright © 2008 Directors & Boards, P.O. Box 41966, Philadelphia, PA 19101-1966. All rights reserved.




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