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.
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The author states that the perception of the stakeholders is all that matters when giving these CEOs their massive salaries – but aren’t most stakeholders disgusted and outraged that their CEO makes 300 times more than them? Does the author only count board members and well-compensated department heads as stakeholders, or are those at the lowest rungs of the company also taken into account?
I sincerely doubt that the mail-room guy or loading-dock worker has the same perception of executive compensation packages as the executives themselves do. People at risk of layoffs and those who have trouble paying down the mortgage also work in these large companies and are stakeholders as well – I highly doubt that they are okay with the obscene salaries of those at the top.
I agree with you that employees do not like excessives executive salaries, but they have to date not taken any action that has affected the company. They certainly could and might, but being disgruntled is not reputation ally damaging if it does not change the value perceptions of other stakeholders. Not being liked does not necessarily change reputation value. A stakeholder is someone who believes he or she should expect value from the organization and has the willingness abpnd ability to take action. To date, we have not seen employees, other than unions, take action.
I do not count any stakeholder as more impotent. If most stakeholders are disgruntled, we have not seen it.
Good post. Provocative.
I’m not sure which methodology you subscribe to for measuring reputation, but it would be interesting to do correlations between some measures of reputation and CEO compensation. It also would be interesting, if it were possible, to look at the correlation between individual stakeholder group assessments of reputation and CEO compensation and combined stakeholder assessment. I wonder, for example, if there would be a difference between employee and shareholder perceptions.
Forest, I’m sure there would be differences between perspectives. Reputation is stakeholder specific, but CEO pay is not an attribute tested by employee research I know of. Shareholders express concerns but continue to elect boards and invest. We need to see behaviors to know whether there are ramifications
I respect your position but flatly disagree with most of your commentary. I’ll confine my remarks to two points:
1. The distinction between income and worth. You cannot compare the incomes of those in the entertainment industry to those of CEOs. The public (for reasons of their own) ascribes worth (or value) to entertainers, sports figures, etc., They buy logo apparel and pay astronomical ticket prices at movies and sporting events to subsidize the stars they adore. They ascribe the worth and that worth roughly defines the income.
A CEOs worth is determined by the board – as you rightly point out. But the public does not ascribe worth to the CEO the way the board does, thus the difference in perceived value in the opinion of the public.
2. You comment: “Reputation is not about being liked, but rather about being differentiated from others in the industry set on matters of importance to stakeholders.”
While I agree reputation is not always about being “liked” is is about being respected. Many consumers will use or purchase a brand regardless of whether they “like” it or not based on countless variables. But few if any will use or purchase a brand they do not respect. I submit many brands would be mightily afraid to see how many clicks they would receive if their Facebook “Like” button was replaced with a “Respect” button…
Thanks for your comment and response. In terms of brands, O&M have a well regarded Brand Asset Valuator that looks at 4 dimensions: differentiation & relevance (brand strength) and esteem and knowledge (brand stature) . While people talk about what they like, they buy what is relevant to their lives. Reputation has similar dimensions. I agree that CEOs should be held to a standard–name one and hold them to it–but my point is that CEO pay is a collective issue and reputation is specific. What this issue does do is lower the overall esteem of corporate America, but it has been low for some time.
Thanks again for taking the time to respond.
POINT OF CLARIFICATION: I am really happy that my post has created dialog on this issue. I want to clarify some points about reputation. We are not talking about what makes you mad. To get a CEO or board member interested in reputation, we need to show that an issue creates behavioral change. For example, talented employees will leave, fewer investors, down grading of the stock, higher cost of capital, etc. Show them a ramification, and you get attention. Otherwise, the reaction is that “you can’t make everyone happy”.
Boards have convinced themselves that they are in a war for talent (the CEO) and that they must pay to retain the CEO. At the same time, most of us know that many CEOs being rewarded are not worth it since they have not produced the results. The large jump in pay this year over last is to reward CEOs for the economic recovery. Start with a low base and everything looks up.
Yes, CEO pay makes employees mad and yes it makes investors mad and yes it is awful. But, where is the evidence that it has behavior implications? That is how reputation is measured? We need to see something happen, and we need to see it versus alternative offerings (competition).
There are a lot of studies that ask consumers questions such as: “would you prefer to buy a product that is environmentally friendly”? The results are that a vast majority say yes. But, the question is like asking if you like your mother. The evidence is in the market. People want these items, but at the same cost. So, the question is interesting and gets people all excited, but the consumer doesn’t behave that way and we can kill a business on the basis of some of these anecdotal studies.
There is a growing movement toward horizontal versus vertical market segmentation, appealing to niche tastes rather than mass tastes. Research has found that about 20% of consumers are willing to pay more for environmentally friendly items, but a larger percentage couldn’t care less and actually rebell against such items because they think the whole issue is bogus. The same occurs with reputation. It is not normative. It is specific to the industry and to the stakeholder. And, we need to see behavior, not just words if we are to invest to enhance the reputation asset we have.
Thanks all for your comments. I know that this is controversial and flies in the face of a lot of thinking that wants companies to “do the right thing” and that that will move behaviors. The right thing matters with who the stakeholder is and what they think the right thing is and what they are prepared to do about it if they do not like it. As I mentioned, there is a potential for reputation risk if experience falls below expectations. If shareholders or employees–the two most impacted by CEO compensation–are dissatisfied to enough of an extent to leave, then risk will occur and good companies will take action to correct. Until then……..
You neglect to mention healthcare insurance companies as purveyors of outrageous CEO compensation (i.e., $100MM+). Think those numbers don’t matter to people? You’d have to live under a rock to not feel the public’s palpable outrage. The problem is that customers no longer matter (healthcare companies, in particular, fail to acknowledge consumers as their primary customers), while Wall Street’s temple of snakes drive most of the C-Suite and Board decisions. Public reputation? Conscience? It never enters their minds.
You make a very good point, Mike. I really have not been living under a rock. I know that there is outrage, but where is it being felt? Show me a metric that indicates that CEO pay is having an impact directly on individual companies. It may be impacting people’s feelings about corporations, in general, but it is not “sticky”. How would Republicans be arguing for tax breaks for the wealthy if this were that motivating of an issue? We beat our chests and shake our heads, but nothing impacts compensation. For years, we have heard about corporate governance. My colleagues in the finance department write a lot of articles about board composition and compensation, but I have not heard of one board that has been dumped because they rewarded the CEO an outrageous package.
Should CEOs think about the issue? Yes, I believe they should. Are CEOs overpaid? Some are, some are not. One would actually think that Wall Street would be the catalyst of action, but they also seem unconcerned.
To paraphrase Bill Clinton, “I feel your pain”, but my point is not that the issue has gotten people mad, but rather whether or not it has impacted the reputation of specific companies.
An interesting post Elliot.
This is something that is prevalent in the UK at the moment with the banking situations we are facing. Top people are getting paid bonuses despite bank losses.
A difficult one, as many CEO’s have worked their way to their positions or sacrificed in order to get to where they are. Maybe there is a smidge of jealousy?