Boyden: What is a CEO Worth?
The credit crunch has put pressure on pay rises in many industries, so why do CEOs seem to be earning more than ever before? Chris Clarke, president and CEO of Boyden World Corporation explains the relationship between pay and success.
There is no doubt that the worsening economic climate in the US and Europe has affected how well CEOs are paid – their pay packets seem to be getting ever larger. Like global commodity prices, where growing demand for dwindling resources pushes prices up, CEO remuneration has risen as companies outbid each other for scarce talent.
CEOs are not feeling the pinch of the credit crunch like many of their employees, but in a sense this is proof that companies recognise the importance of strong, experienced leadership in challenging times. ‘The reason that CEO pay is often perceived as high by the popular media is that every corporate situation creates a unique buyer, with a particular set of problems and opportunities,’ says Chris Clarke, president and CEO of Boyden World Corporation. Boyden is a global leader in the executive search industry and specialises in high-level executive search and interim management across all industries. Its role is to find candidates for senior management positions who fill the specific and often unique needs of each client company.
For Clarke, the focus is on quality rather than quantity. The goal of Boyden is to identify leaders with the right skills and experience to guide an organisation towards better future performance. ‘There may only be a handful of candidates qualified and willing to consider each role,' Clarke says. 'They are usually already successful CEOs or running a significant division of another firm. This means that they are already well paid and have accrued significant benefits. They may have to leave long-term incentives if they take the job.’
The result is that those companies that most need leadership skills to transform their organisations, or which face particularly testing times ahead, have to dig deep into their pockets to afford the talent that can drive their vision forward. ‘Consequently, the client firm has to pay a sufficient premium over the existing job to reward the new CEO and offset the risks that the CEO takes in moving,' Clarke says. 'In many cases it is the firms in the worst trouble that have to pay the highest amount, otherwise it would be difficult to attract a CEO willing to take on their floating wreckage and steer it to profitability.
The risk of failure means that the personal risk to the CEOs reputation is significant. The required rewards are, therefore, higher.' Clarke notes that in hard times companies will pay more to get the best people. 'If a firm is in deep trouble, the road to success is tougher. The risks are greater. The heroic CEOs, who can turn around such businesses, expect heroic pay,’ he says.
The push and pull of the market
There are many factors that have a bearing on how well CEOs are paid. On the demand side, for instance, the long-term trend towards globalisation and overall growth in the global economy – US recession fears notwithstanding – mean that CEOs with international skills and experience are in great demand. ‘On the supply side, in our sybaritic era, many executives are focused on their work/life balance and are unwilling to move to take on such roles,’ Clarke observes. He also notes that in individual cases, the way that some executive search firms push their favourite, more highly paid candidates also leads to excessive CEO pay.
‘It is often the case that a successful CEO in one role fails miserably in another. A deep understanding of corporate needs and challenges and matching them to those CEO candidates with the corresponding experience, track record and skills is essential,’ he adds. ‘The opposite occurs, if the search firm and the board’s nominations committee team up to ensure that there are several good candidates presented rather than just the 'usual suspects'. If the client becomes fixated on one candidate, then that candidate has very high bargaining power. This can be avoided.’
While he agrees that CEO pay will continue to rise, Clarke nevertheless points out that there are many forces at work that might counter this trend. For instance, the role of the CEO is increasingly separate from that of the chairman. A joint CEO/chairman can hand pick, or at least influence, the selection of board members, who are then beholden to the CEO and may be more likely to rubberstamp pay awards.
Clarke also notes that shareholder activists and institutional stockholders are under their own performance pressures when times are hard. He finds that they are now more aggressive in their approach and members of board nominations and compensation committees are keen to avoid negative personal publicity. The media also plays up CEO pay rises, ever keen to root out examples of excess.
‘Coupled with these factors there are also tighter governance rules for many boards, meaning that some have to fight to get stockholder approval for CEO pay. Politicians take a populist line on this issue, as it helps them win the support of their electorates. This leads to tighter regulations and political scrutiny, which most firms would prefer to avoid,’ says Clarke.
Firms must also consider that upping the pay of senior executives does not go unnoticed within the organisation, let alone in the wider business world. If a poorly performing company hikes its CEO’s pay package it must be careful how it sells this move to its stakeholders. ‘The key factor is for the firm to use its PR and investor relations teams to ensure that the need for the big bucks is clearly articulated and understood by customers, stockholders and employees. These people do not want to hear “things are tough, so we are hiring a dummy because he is cheap”, so tell them the opposite,’ Clarke suggests.
Keeping your balance
It may be possible to sell this message better if there is a clear link between business results and the reward paid to a CEO. Market pressures may be forcing executive pay upwards, but there is no guarantee that big bucks bring success. ‘The key to success is to relate the reward to success. Private equity firms, unshackled by the regulations of public firms, attract top CEOs. They pay handsomely for results and not for failure. Most CEOs will expect sufficient basic pay to maintain their standard of living and their pension rights. They then expect much higher rewards for delivering their corporation from the brink of disaster and back to success,’ explains Clarke.
Financial remuneration is usually an important recognition and indication of status for a CEO. Yet companies might do well to remember that it is rarely the key motivator. If it is, then the nominations committee should perhaps question the suitability of the candidate. ‘In our experience, top performing CEOs are motivated by their ability to make a difference, by the complexity and challenges of the opportunity and by the quality of support and resources available to them rather than by pay,’ says Clarke.
The question, therefore, is what does a company have to offer to compete effectively in the market for senior executives? For Clarke, the answer lies in tailoring the rewards package to the individual candidate. ‘The most appropriate incentives package also requires a strong bespoke content,' he says. 'Of course, board compensation committees should be very suspicious of any candidate that expects the entire package to be torn down and recreated entirely to his or her taste. Any firm today should expect CEO candidates to be acutely sensitive to how the package would play in the press and the importance of reputational risks to the employer,’ he says.
‘This said, there are great differences in the needs of different CEO candidates. Pensions feature more in the minds of some, especially if they see this as the last major challenge of their career. 'For some it is the details that may count. They may not be the most important financial element, but show that the corporation cares. Things such as moving costs and other elements to help the disruption to the family might be important. The crucial thing is to ensure that incentives encourage and reward long-term performance.’ The current business climate means there are many opportunities for a CEO to make a big difference. The key is to match the person to the position, not just the pay.