Executive comp debate gains momentum

Will Seattle CEO’s self-imposed pay cut add fuel to the fire around C-suite salaries?

Controversy over executive compensation is nothing new, but it’s an issue that’s been grabbing headlines over recent weeks. CIBC shareholders voted against a generous pay package for outgoing executives last month in a non-binding say on pay vote. And Barrick Gold said it is “re-examining” its approach to executive pay after 75 per cent of investors voted against its executive comp plan. 

Putting a new spin on the issue was Dan Price, founder and CEO of Seattle-based Gravity Payments, who slashed his own salary from just under US$1 million per year to US$70,000 — while raising the minimum salary for his 120 employees to US$70,000. 

Before the reallocation, the average salary for employees was about US$48,000, according to Forbes. The raises will be phased in over a period of three years. 

“There’s greater inequality today than there’s been since the great recession,” Price told the Huffington Post. “I’d been thinking about this stuff and just thought, ‘It’s time. I can’t go another day without doing something about this.’”

There will be some sacrifices, said Price. “But, once the company’s profit is back to the US$2.2-million level, my pay will go back. So that’s good motivation.”

The impact on employees will undoubtedly be positive — but it may not last as long as we might imagine, said Bob Levasseur, senior consultant and principal at McDowall Associates in Toronto. 

“One of the things that has astonished me the most about compensation is... people forget very quickly about compensation. There are so many other factors that make your workplace one that you want to stay at,” he said.

“A change in compensation usually has a very short-term effect. You still come into the same place; if your boss irritates you, your boss will continue to irritate you.”

Depending on how the raises are structured, there’s also the potential risk of stirring tensions and resentments among employees, said Rick Schubert, associate partner, executive compensation, at Aon Hewitt in Toronto. 

“Let’s assume that everybody currently is being paid roughly according to market. So somebody making $75,000 would have skills and experience that somebody making $35,000 wouldn’t. Put yourself in the position of the employee making $75,000.”

And in a large organization, bumping employee pay to levels much higher than market value invalidates much of the work HR does, said Levasseur.

“First of all, you have an HR department that has spent a lot of time, expense and whose credibility is on the line to determine what the market is for their employees’ compensation. 

“So if you come in and say, ‘Yay, I’m giving everybody a big increase,’ then you’ve basically just undone all the work that these people have done. You’re sort of suggesting to your employees that their HR department, their compensation department has been lying to them and hasn’t been paying them enough.” 

Trend or anomaly?
In determining whether Price’s pay cut has the potential to become a trend, it’s important to consider that his is a private company, said Schubert. 

“When you’re looking at this, you have to bear in mind that Dan Price is the founder, he controls the company, it’s a private company… so he does not have the normal shareholder pressures that publicly traded companies or even more broadly held private companies can have, and that gives him a much freer hand to do things that normally wouldn’t be tolerated by shareholders or by the market, perhaps.”

You just couldn’t make this kind of move in a publicly traded company or in very large organizations, said Levasseur — and even in smaller organizations, it may not be tenable because many CEOs don’t earn nearly as much as we imagine. 

“It’s more of an anomaly than a trend,” he said. “There are many cases in many private organizations where the owners are not making much more than their employees. There is this myth that  — because of all the stuff that we see in the media around executive compensation — that anyone who has the title of CEO is pulling in about $20 million a year. 

“That’s not the case — there are many, many CEOs, many owners of companies, that are not raking in millions of dollars. Some of them are making slightly more than their highest-paid employees.”

It’s also important to remember that organizations — particularly private companies — can compensate people in different ways, said Levasseur. There are probably many such instances we are unaware of.

“Sometimes, they’ll suddenly make their employees shareholders or they’ll give them a huge bonus. What’s unusual about this one is that he’s really committing to changing their salaries.”

Other organizations may somewhat follow suit when it comes to raising wages for the lowest-paid workers, said Claudine Kapel, principal at Kapel and Associates in Toronto — WalMart is just one recent example. 

“Near-term though, likely a lot of the activity will be in the U.S. where the minimum wage tends to be much lower. But I think that we’re going to see this pressure building in Canada as well,” she said.

“The lowest-paying jobs tend to have the highest levels of churn, and turnover has a price in terms of productivity losses, recruiting costs or the costs of bringing newly hired talent up to speed and getting that new talent developed. So there are costs associated with not being able to keep people that if you take steps to bolster wages, you could help mitigate.”

Increasing wages can have a profound impact on employee loyalty, especially when an organization makes the decision to lead the market or offer more than its competitors for talent, said Kapel. 

“Such a strategy can really enhance an employer’s brand and company reputation. But it’s important to keep in mind that it’s not just about the amount of money being offered — it’s also about the timing of the change as well.”

Early adopters are likely the ones who will distinguish themselves by being first out of the gate to deliver something to employees that creates a more compelling or noteworthy employment proposition, she said.

“If you’re the last organization to do something like this, you’re not going to get any points — you’re just going to be the one that’s going to be closing gaps to market,” said Kapel.

Impact on CEO pay debate
Will Price’s decision add fuel to the fire of the executive compensation debate? It’s difficult to say, said Schubert, since Price’s circumstances are quite different than those of CEOs of large, publicly traded companies. 

“His circumstances are sufficiently unique that I would be surprised if it had any material effect. To the extent that you see CEOs at larger, name-brand, publicly traded companies moving in this direction, I would see that putting much more pressure on because then you’re dealing with a peer,” he said. 

“(But) I think you’ll run into trouble with your shareholders if you say, ‘Well, I’m going to pay people double their market value.’”
Kapel agreed a move like Price’s may not necessarily go over well with shareholders. 

“Near-term, shareholders may not like the approach because you’re redirecting dollars that could otherwise make your organization more profitable into investments in people. But we see the organizations that are pushing the boundaries are really laying the groundwork for more effective talent management in the years ahead.”

Even if the CEO of a very large organization were to cut $1 million from his own pay, it wouldn’t have the same impact, said Levasseur. 

For example, assume the CEO of a company with 20,000 employees is making $10 million a year, he said. 

“And let’s assume this person were to take a 10 per cent pay cut — in other words, give $1 million to their employees. That’s $50 per year per employee.”

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