Editor’s Note: The following is a guest post from Elliot S. Schreiber, Ph.D., a leading expert in corporate brand and reputation management. He previously blogged for PRSAY about reputation management and the changing nature of corporate trust.
The New York Times published an article April 12 concerning executive compensation that showed that CEOs continue to be richly compensated and that executive pay has jumped considerably year-over-year for most companies.
Around the proverbial “water cooler,” which today amounts to Facebook, Twitter and other social media, there was a lot of criticism and consternation over executive pay.
Compensation of American CEOs runs twice that of comparable European CEOs. In many countries, there is close scrutiny of CEO pay and of the salary differential between the CEO and average employee. Some of these countries have regulatory and stakeholder pressure to keep salaries more modest, but generally, the enormous U.S.-style salaries run counter to the culture of these countries, which tends toward greater socialism.
In the U.S., the annual release of executive compensation is akin to watching the “Running of the Bulls.” We wait for the event yearly, knowing that craziness will ensue. At the end, most of us walk away shaking our heads asking ourselves, “What were they thinking”?
The question of whether any CEO is worth what they are paid is not new. All that changes is the dollar amounts.
When I was at the DuPont Company in the early 1980s, our CEO, Irv Shapiro, was asked on the Phil Donahue Show (some PRSAY readers may be old enough to remember his show) to justify his $1.5 million compensation. The audience gasped upon hearing the number.
What has changed is that extraordinary wealth has emerged in other areas of American life. While Shapiro was make $1.5 million, sports fans were aghast that the Philadelphia Phillies was willing to pay Pete Rose $700,000 a year. How can we get upset today with a CEO making $20 million when Ryan Howard of the Phillies signs a $125 million, 5-year contract or the reality-TV “star” Snooki gets paid more than a Nobel laureate to speak at Rutgers?
Compare that against CEO salaries and it doesn’t seem so outrageous to pay an executive tons of money.
There are a number of other specific reasons that this issue is not so alarming.
First, reputation is the expectation of value by a stakeholder vis-à-vis peers and competitors. The expectations in the U.S. are that CEO pay will be high. While corporate leadership is a driver of reputation, the key attributes are found to be ability to develop, articulate and execute strategy, not how much the executive is paid.
Compensation experts tend to agree that executive salaries should be guided by the salary scale inside the company, and also by what is normal and expected within the industry sector. The truly outrageous salaries we hear about are typically in the financial services, media or high-tech sectors, where high salaries abound, both within the companies and within the competitive sets.
Of course, we also regularly hear about the “outrageousness,” e.g., awarding the Transocean CEO a bonus as a result of a good safety record, even though it was Transocean’s platform that exploded in the Gulf.
Let’s remember that a company’s board sets executive salaries. Corporate governance experts have been looking at the issues of compensation. While they argue that these things have reputation impact, they also find that the extent of knowledge and concern is on such a narrow segment of the stakeholder universe to be de minimis to the overall reputation of the company.
At the same time, there is always a risk to reputation from such high salaries. All stakeholders can either create or destroy value, directly or in concert with others. One could envision increased reputation risk should the compensation issue become a larger one for certain stakeholders who “connect” with others who are concerned, e.g., employees and investors, which could create greater reputation risk and impact the company’s ability to succeed.
There is a curious twist on how we view compensation. Several years ago, I was invited to give a speech to the secretaries of labor of the 50 state governments about how to build the reputation of state government work to attract “better and smarter employees.” As in any matter of commerce, issues of price depend on perceptions of value. As perceived value goes up, concerns about price diminish. Government workers are perceived to be less qualified than those going into the private sector, and so they “deserve” less pay.
We are seeing this issue played out across the country.
While there are some PR experts who might suggest that the CEO or the company could get a reputation boost by announcing that they are taking less money, the rewards on such action would likely be realized in heaven, but not in the overall reputation of the company. Reputation is not about being liked, but rather about being differentiated from others in the industry set on matters of importance to stakeholders.
The compensation issue does not seem to have much “stickiness” with most stakeholders.
Elliot S. Schreiber, Ph.D. is clinical professor of marketing and executive director of the Center for Corporate Reputation Management, LeBow College of Business, Drexel University, Philadelphia. During his career, he has been in sales, corporate strategy, marketing and communications. He was CCO at Bayer, Pittsburgh, and CMO and CCO at Nortel, Toronto. He later was president of a strategy-consulting firm. He also heads his own consultancy, Brand and Reputation Management LLC. He holds a Ph.D. in Communication (1977) from Penn State.