Two news items this week illustrate the rational and irrational sides of executive compensation.
The first was a published report that CEOs recruited from outside a company earn an average of 65% more than those promoted from within. The discrepancy was greatest in smaller companies. The writer reporting on the study spun the results as conclusive evidence that organizations of all sizes must get their succession planning acts together.
Such studies appear regularly in the press, seemingly always with the same conclusions. But it does not take a major study to argue that in an ideal world, CEO salary costs are best managed by promoting from within. Unfortunately, and inconveniently, conditions are not always ideal. Contextual changes of all sorts regularly impact businesses, sometimes traumatically, driving them to seek perspectives or skills different from those developed in-house. Smaller companies lack the resources and critical mass to develop business leaders for futures which have yet to be charted let alone lived. And let’s face it, except in the most stable of businesses, risk-mitigating boards will almost always favor seasoned CEOs over up-and-comers with no experience in the corner office.
When firms recruit from outside, higher compensation is often required to offset the risks and costs of the new executives leaving one company for another including lost benefits and equity. The smaller the firm or the greater the challenges facing the executive, the bigger the risk and the higher the premium attached to the move.
Though such arguments may be reasonably rational and defensible, it is the less rational decisions regarding executive compensation that catch the attention of the press and infuriate so many observers. Take the hiring last week of Thomas Montag as head of sales and trading at Merrill Lynch. Before retiring in December of 2007, Montag spent 22 years climbing to the top of Goldman Sachs, a company called ‘the most profitable securities firm in the world’. According to a headhunter interviewed for an article on his hiring, it is very difficult to recruit Goldman executives, so when they retire or leave, a feeding frenzy for their services almost always ensues.
So what does it cost to ‘unretire’ a Goldman Sachs superstar? First, he will receive a base salary of $600,000 per year beginning on his first day of employment which was last week. In addition, Mr. Montag will receive a guaranteed stock and cash bonus of $39.4 million payable in early 2009. Merrill will also buy out what remains of Mr. Montag’s equity in Goldman Sachs, which will boost his entire compensation bundle to at least $50 million in the first year, all guaranteed. The actual offer of employment is available online for those who did not win last week’s 6/49 jackpot of $43mm and want to play a little Fantasy Island cut and paste.
The question of course is whether Mr. Montag is worth $40mm for what amounts to five months of work? Is this an unreasonable ‘boom time deal in a bust market’ as the Wall Street Journal suggests? Why pay such a premium for someone not employed? And with $40 million guaranteed just for showing up, are his interests really aligned with shareholders? On the other hand, perhaps this is simply the going industry rate for someone to fix a company losing billions of dollars? Or maybe Morgan Stanley or someone else was also pursuing Mr. Montag’s services resulting in a bidding war?
Though answers to such questions were not forthcoming in the press releases, the hiring provides a glimpse into another side of executive compensation. On the surface, Mr. Montag is a long-time, single employer executive with little discernible experience in executing turnarounds who is being paid an extraordinary amount of money to see if he is any good at it.
Notwithstanding this, the optics for Merrill Lynch CEO John Thain are very good as he lands a big fish from an unimpeachable firm, demonstrating that he is acting decisively and sparing no cost to fix his company. Sensible or not, it is a politically safe hire, one that placates shareholders and buys time. And it shows that some executive compensation decisions are driven not by rational selection considerations only but by a tapestry of forces such as politics, power, expediency and such powerful emotions as lust and fear.
It is exactly because of the coexistence of the rational and irrational in executive compensation decisions that all of the performance data supporting the premium paid to outsiders is so underwhelming. It is also why the issue frustrates so many.
Looking for a dynamic HR role? Stay away from the entrepreneurial tech sector.
January 1, 2012
In a recent survey of HR graduate students, the technology sector rated among the most coveted destinations to ply their trade. It is viewed as a world of innovative people, technologies and approaches where progressive talent management, OB/OD and related HR work awaits.
The Cry to Replace RIM's CEOs – A Truly Dumb Idea
October 13, 2011
Leaving aside the recent service outages, the shellacking of RIM in the press is a tad surreal to behold.
For the few Luddites not familiar with the firm, Research in Motion is the successful Canadian smart phone pioneer with revenues of $20bb per year, no debt and cash in the bank. They manufacture products that remain popular around the world and continue to boast technological innovations unmatched by any competitor. Their most recently launched smart phone devices have been well reviewed and appear to be selling well. And though the company's first version of its new tablet, the Playbook, has room for improvement, it is a promising piece of technology.
Context: When Companies Confuse Start-up Experience for Start-up Experience
October 7, 2011
I had the occasion this week to chat with an entrepreneur still licking his wounds from a stalled startup venture. His tale is a reminder of how easily companies misunderstand organizational context when hiring. For startups, such a misunderstanding can be fatal.
The CEO Hiring Practices at HP
October 3, 2011
The press tells us that Hewlett Packard is the largest technology company in the world with revenues of $126bb. Impressive as those numbers may appear, they do not seem to impress HP's Board of Directors. You see they do not believe that any of the firm's 324,600 employees are capable of leading it. Not one person. Not this year or last year when CEO changes were made. In fact they were apparently not capable six years ago or even eleven years ago when CEO changes were also made. But before summarily indicting the firm's succession planning/leadership development programs, it is useful to consider the track record of the external candidates who were considered better choices than the firm's internal candidates. This analysis decidedly shifts the spotlight to the competence of Hewlett Packard's Board of Directors.
The Folly of Believing What You Read
September 19, 2011
Some time ago we posted a blog titled ‘So you REALLY want to be a CEO?' which looked at the human costs of climbing the upper rungs of the management ladder. The blog was based on a series of articles immediately following the ‘resignation' of Pfizer CEO Jeff Kindler. All of these articles presented a cautionary tale of life in the fast lane, the long hours, the extensive global travel, and the shareholder pressures that accompany an uncooperative stock price. They also spoke poignantly of the physical and emotional toll that such unrelenting pressure took on the Pfizer CEO who eventually resigned in order to attend to his family and health. As it turns out however, much of this narrative may not have been true
Before sending us your resume (and then getting frustrated with us) ask who we work for
July 25, 2011
A friend of mine is a trustee in bankruptcy. As his title suggests, he and his firm serves those contemplating the ‘cleansing' process of personal bankruptcy. Potential customers compare service providers, select one, and then pay the chosen firm a fee to initiate and manage the ensuing process on their behalf. However, as soon as the relief-seeking customer signs on the dotted line, the trustee's allegiance shifts to the creditors for whom they then seek to maximize debt recovery. This shift in who works for whom must be a tad unsettling for people who already have a heap of problems and stress on their hands.
What Dating Services Can Teach Companies About Hiring
June 1, 2011
Executive-level hiring is a decidedly aspirational endeavor. Organizations idealize their workplace cultures, select for attributes that will fit into those romanticized environments, and then immerse unsuspecting hires into their ice-cold reality of their works-in-progress.
How to Survive a Startup - by Jill Ram
April 20, 2011
If you're an executive and you're thinking of joining a start-up, know what stage of a start-up to join. If the company is in its first year or so, don't expect to make significant changes. If you join after the company is somewhat established and mistakes have been made and learned from, you'll likely be more successful from the outset. If the founder has stepped aside, well, by then, the company is likely not considered a start-up anymore. It won't be functioning like a big company yet, and it won't have all the structure in place that it needs, but it will be run with more practicality and with less emotion. Timing is everything so choose it well.
Good News for the Old, Overqualified and Overlooked
March 18, 2011
It is expected that a significant percentage of the baby boomer generation will drive right past the Freedom 55 highway exit. For many the goal of early retirement will have proven to be unattainable hype, while for others the ups and downs of working will appear more attractive than the prospects of working up and down the local lawn bowling leadership board.
Pressed for time? Blame those Benedictine Monks.
February 24, 2011
It is among the principal reasons candidates tell us they are open to consider a change in employers. They are tethered to it, yet somehow it still flees. It is time, the most precious of resources, and for many harried executives they want some of it back.
Though their relationship with time may be strained, it is worth pointing out that it was not always this way. In his fascinating book Time Wars, Jeremy Rifkin chronicles the evolution of our modern relationship with time. He points out that in traditional agrarian and pastoral cultures, time was a very naturalistic notion maintained in cyclical, repetitive, biological and even sacred terms. The ‘passing of time' was cued via the changing seasons, biological lifecycles and lunar patterns and thus, the cadence and tempo of those societies were finely tuned to the cyclical rhythms of their physical environments. As he states, "Our early ancestors coveted the circle, perceiving time as eternal return, a ceaseless repetition of an endless cycle of birth, life, death, and rebirth". Since these cyclical rhythms could neither be accelerated, nor altered, the cadence of these societies' was natural and harmonious.
The Premium Paid for Outside CEOs – Sane or Insane?
July 1, 2008