Hugh Latif is a management consultant and the author of the book Maverick Leadership.
Business media is often critical of overly excessive executive compensation, and for good reason: In public companies especially, the compensation levels for CEO’s and other senior executives has steadily increased over the years.
The arguments for hefty executive packages always seem to include the following points: first, there is a need to attract the best available talent; second, you can’t retain the top person without proper compensation; and third, executives who generate stellar results for their organizations and who create value for their shareholders through higher valuations should be handsomely rewarded.
That is all fine and good. But whether you agree with this argument or not, I fail to understand why incredible compensation packages are awarded when the results are poor. Take the recent example of a large, public Canadian company that has been in the news lately. And it has been in the news because of the compensation package awarded to its chief executive even though the company has experienced a steady decline in sales the past few years, and has operated at heavy losses in four of the past five.
What’s more, the market value of this company has also declined significantly, to the point where original investors in its IPO saw their investment decline by more than 40 per cent.
Executive compensation is made up of several components, but usually the three key buckets are: salary, a performance bonus and shares. If the CEO and the senior team succeed in turning around the results of the company, then they will be rewarded through a performance bonus and a share valuation. On the other hand – and this is very important – the fixed salaries of those people should be in proportion to what the company pays all its employees.
My point here is that the salaries of the most highly paid executives should have a direct relationship to the salaries and wages paid to employees. Why? I’ll get to that in a moment. But there is a mathematical way to figure out senior compensation levels that are appropriate.
Allow the person’s salary to be expressed in a multiple of the salaries of lower-echelon employees. And stick with that multiple. For example, let’s say the CEO salary should be 30 times the average salary of a mailroom employee. If that mailroom employee is paid $15 an hour, then the CEO pay should not exceed 30 times $15. So, if the mailroom employee has an annual salary of $32,000, and we stay with this multiple of 30 times, then the salary of the CEO should be about $960,000.
This ratio can be used effectively to help keep a balanced relationship between the salaries and the HR levels of the entire organization. But how do you arrive at a balanced or reasonable multiplier? While there is no exact figure that will be suitable in every case, comparing salaries within management is a good place to start. Let’s compare the CEO salary to that of a mid-level manager.
Let’s assume that this particular corporation has 100 stores and that every store generates a profit of $1-million, which gives us a consolidated profit of $100-million. By any account, this company is performing pretty well, and it’s doing well throughout the whole organization.
If the general managers who head these stores make about $100,000 a year, the CEO salary of $960,000 is now only about 10 times the salary of the general managers. We now have a range where the CEO salary is between 30 times that of the lowest-paid employee and 10 times that of middle managers.
While executive compensation is generally criticized by shareholders, my ratio takes into consideration employee morale. Indeed, how would you feel as a manager if you knew that the CEO salary is equal to 30 or 40 or 50 times your salary? That, as opposed to 10 times your salary, which to me sounds a lot more reasonable.
Boards that are exclusively focused on protecting the interest of shareholders – and only the shareholders – often demonstrate an incomplete recipe for the modern business environment. Compare those boards to ones that are focused on protecting the interest of all stakeholders, including employees. One thing I can tell you is that the latter will be more successful in the long term.
This column is part of Globe Careers’ Leadership Lab series, where executives and experts share their views and advice about leadership and management. Follow us at @Globe_Careers. Find all Leadership Lab stories at tgam.ca/leadershiplab.
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