Barrier:
Exorbitant Executive Salaries = Resources Wasted On Those Who Don't Need Them

By Aaron Anderson - Director of Strategic Organizational Initiatives at San Francisco State University, College of Business

April 27, 2011 at 10:08am

Executive Salary

Slack Resources

Resource Dependency Theory

Moonshots

Focus the work of management on a higher purpose

Reinvent the means of control

Create internal markets for ideas, talent & resources

Summary

I've always admired CEOs who forgo multimillion dollar salary payments, like Jobs at Apple, but if you drill into the pay-scales at the top companies, you can see that executive compensation has, well for lack of a better term, gotten way out of hand. Might executives who accept and the boards who award the top tier lavish salaries be raiding the company's till to the detriment of an organization's ability to innovate?

Description

This is a classic resource dependency problem for people who work in operations dependent on front line service or creation of innovative products. If you were able to calculate salaries at most mid-level companies in the C-Suite, you would find that the company itself must generate multiples of millions of dollars to support the smallest number of people, who, arguably may have responsibility for generating leadership and creativity in an organization, but so few of them are the caliber of Jobs who can (or at least I think he can as I don't know him but have shook his hand once or twice at shareholder meetings) shape the entire direction of a product in about a 20 minute redirect meeting with a product development team. These resources, cemented by employment contracts, may be dependent upon success of share price and profit growth, but the base salaries lock up substantial resources that cannot be used for other purposes.

Illustration

Let's say you are a Board member of a middle level publicly traded company. Your job is to hire and fire the CEO, and no doubt, there will be some kind of executive compensation committee on the board whose main function it is to develop a compensation package that will "attract the management talent that will help us grow the company and increase shareholder value." You are heading this committee. You search out best practices. You conduct diligence by contracting with a competitor analysis firm to see what your competition is doing. You hire a executive salary development firm for advice, and you aim to follow it. As you conduct the work, you look at all the levels of the company and you set your levels at a point where you think a) it will be attractive enough to bring in top talent, and b) will be sustainable given the output levels and net revenue for your company. You toss the package to your shareholders, they vote on it, but because you own a controlling stake in the company, your vote carries the most sway. Your package passes.

Here's the question. Should you lock up that much money in feeding the salaries of so few people, or might you be better off with a Jobs like situation - where you set the base salaries, nominal bonuses, and set most of the remuneration based on shares distributed in option plans, which are heavily dependent upon the fluctuations on on the open market? If you opt for this move, this should free up resources which would otherwise be spent on executive compensation, and allow it to be used as resources to feed innovation at the spaces in the company where creativity and invention will have a higher ROI. In other words, freeing up capital not used for executive salaries can be alternatively used as slack resources to generate room for big changes both organizationally and product-wise within the corporation.

Root Causes

At least in the United States, the competitive landscape for high quality executive-level management feeds and breeds an overly inflated set of salaries at all companies because of the perception that if your company doesn't pay like the top paying corporations, you will lose the leadership as your top performers will be poached by another operation at best, or by your competitor at worst. This is a never ending cycle, and rarely will a company cut C-Suite salaries - unless the operation goes Chapter 11 or some sort of intervening economic crisis warrants it.

This is a classic resource dependency problem outlined by Pfeffer and Salancik. If you would like to drive change throughout an operation, one has to create slack resources that allow a shift from the old ways of doing by creating resource reservoirs that can be directed toward encouraging new ways of behaving and operating. Easy to articulate on a web location. Harder to make happen in the real world.

Solution

The solution is relatively simple, particularly given the complexity of the situation that keeps us stuck in the status quo. First, you need an iron stomached board of directors. Next, you need to set realistic salaries, such that salary and subsistence concerns are subtracted from your top executives set of worries. In other words, you do have to pay your executives well, but beyond a certain level, the money isn't a motivator for improved performance on their part. The challenge is setting the salary at the right level. Lastly, you must develop an innovation reservoir with those funds generated from not paying out the multi-million dollar salaries that has a specific directed aim of generating organizational slack that encourages people to let go of the status quo and invent the new ways of doing that lead to new products or better performance all around.

In looking around my own industry, a good example here is salaries at the University Presidential level. Often, Presidents of such universities are remunerated with much more than a regularly large paycheck. They get an on campus and off campus home. They have chefs, personal assistants, chauffeurs or university cars, police protection, luxury box seats at the stadium, etc... After, say, about 100 to 250K, what does the salary get you in terms of performance at the presidential level (and I know I'm leaving out the presidents executive level cabinet - which would be a fun fiscal case to examine at some point)? The argument from the board may be, well, we get top drawer leadership and this person brings in multimillion dollars in funding for the school, which more than covers the costs of those perks.

The question I raise here is as to if the monies beyond a certain level of salary might not be better spent on developing a pool of resources that can be utilized to generate organizational slack that can invigorate invention, creativity, and lead to new ways of doing in an ongoing way that allows people to break free of the shackles of the long standing tradition or status quo.

Credits

I have to credit Pfeffer and Salancik for their resource dependency theory here. And, I'm sure I'm not crediting a large number of folks who are pointing their fingers at just the same kind of barrier. Suffice it to say, I know the idea is not original, and I'm only just the scribe to write it down.

Videos

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November 6, 2013 at 8:30pm

Jennifer Hill

Executives are the backbone of the organization and therefore we should be more aware of the different organization and it is more important that we should focus on our career. There are more exorbitant executive salaries which will be only available to the person those who are working for the organizations. We should generally focus on the management work on higher work, the reinvent the worker of the organization.

November 18, 2012 at 6:09pm

Nan Mehta

The videos are ABSOLUTELY BRILLIANT and really "drive home" very important points!!! FABULOUS WORK!!!

January 8, 2012 at 9:46pm

arifhossen

Thanks for sharing Executive salaries history.

May 6, 2011 at 1:20am

Hans Dieter Schulte

IM not sure they dont need the remuneration, lets face it in a world of unlimited wants there is always a need.
I think the better question should encompass a 'should' perspective. Should the executives who may have risen to their positions of power and fortune by unsustainable means be rewarded on ethical grounds in the way that they are?

This is central as we slowly negotiate the corner of sustainability on this one lonely planet. Change needs to be 'area agnostic' especially when dealing with sustainability issues. The holy cows of unfettered profit maximisation need to be put out to pasture and society needs to start asking the tough questions in my opinion.

April 29, 2011 at 12:42pm

jacque.vilet

Hi --- the problem with executive pay does include salary ---- but it also includes stock. The stock awards are extremely difficult to understand, rely on calculations that are at best "assumptions" and not really tied to performance. Some of the best minds in executive compensation today (and I don't mean the typical "big box" firms are struggling with this. CEO's have less control over the market price of company stock now with increased globalilzation as well as the fact that there are fewer investors in the U,S. market. More large investors and frankly more "hanky panky" in terms of hedge fund/deriative involvement and funds that bet both ways on company stock ---- both rise and fall.

So stock plans and how to incorporate them in executive compensation is the real question. Maybe we are ready for a totally new way to reward execs.