Since those comments by the head of General Electric, the question of “internal pay equity” – the gap in compensation between chief executives and their most senior underlings – has climbed up the corporate governance agenda.
After years spent focusing on the value of the princely pay packages commanded by corporate leaders, shareholders, and to a certain extent regulators, have begun looking at boardroom inequality.
Their argument is that a large differential between those at the top of the ladder and those just below – chief financial officers, division heads, or even superstar sales executives – is a symptom of deeper malaise.
Christopher Ailman, who manages more than $170bn for the California State Teachers’ Retirement System, believes that a yawning gap points to weak corporate controls. “Paying chief executives an excessive amount relative to their number twos is a warning signal that the chief executive may have the compensation committee sewn up and that the board is not doing a good job of the succession plan,” he says.
Others warn that funnelling a large part of the executive compensation pool to the boss can damage shareholders by demoralising senior management and future chief executive candidates.
“A large differential can actually harm performance because it is demotivating for the senior managers,” argues Ann Yerger, executive director of the Council of Institutional Investors,.
Two weeks ago, the Council wrote to the Securities and Exchange Commission, urging the regulator to ensure that “companies... adequately disclose each [executive’s] compensation and explain the reasons for the differences in the amounts awarded to each”.
Mark Van Clieaf, managing director of compensation consultancy MVC Associates International, says directors should police pay equity more strictly: “Large shareholders are asking about it, regulators are asking about it, so directors should take a look at the issue.”
Yet few dare quantify what an “excessive” differential actually is.
A Financial Times study confirmed the widely-held assumption that, on average, chief executives earn twice as much in total as their closest lieutenants. The gap has been rising, partly due to a recent explosion in options awards.
But some internal pay chasms are bigger than others. In such cases the question is whether CEOs are “worth” such a multiple of their number twos.
Last week, the chocolate group Hershey announced that Richard Lenny, chief executive, would hand over to chief financial officer David West in December. Last year, Mr Lenny’s compensation was nearly seven times higher than Mr West.
Will Mr West’s pay now be boosted? And why was there such a large gap?
Hershey was unavailable for comment.
Other companies criticise new rules on how to report executive pay and point to the share price performance achieved under their chief executives, their responsibilities and length of service.
Centex, a homebuilder, says the new “summary compensation table”, which includes the value of unexercised options in the tally of executive compensation, “oversimplifies to the point of misleading about the context” of pay awards.
The company, whose chief executive Timothy Eller earned nearly five times as much as co-president David Barclay, said that by counting previous years’ option grants, the table magnified the compensation of long-standing executives.
A spokesman for Black & Decker, the hardware manufacturer, said that one of the reasons for paying chief executive Nolan Archibald $10.2m compared with the $2.2m received by chief financial officer Michael Mangan was that Mr Archibald has headed the company for over 20 years. Mr Mangan, on the other hand has been in his position since 2000.