Communication Tools

As the economy edges toward recession, companies and their leaders are increasingly vulnerable to public attacks over the issue of executive compensation – and, specifically, what many see as an uneven and unfair pay differential. With U.S. CEOs making, on average, 369 times more than a typical worker, there’s little doubt that perceptions about excessive compensation fuel vitriolic attacks, especially when rewards don’t align with returns.

 

From ambitious politicians and customers, to shareholders and employees, to regulators and other interest groups, all of them have the potential and motivation to use the current economic uncertainty to make life far more difficult in the Court of Public Opinion for the companies they target.

 

The need to link pay to performance – and to be seen doing it – is indeed greater than ever before.

 

Consider the tale of investment bank Friedman, Billings, Ramsey. During the ten years that FBR has been selling shares to the public, customers and investors have lost money, constant restructurings have taken place, and a trading scandal forced one of the founders to resign. Those setbacks didn’t stop top executives, who were already earning as much as $10 million a year, from “accepting” bonus packages that totaled $30 million in the same year the company lost $740 million.

 

And the marketplace made is displeasure known. In April 2008, FBR’s stock traded well below $2 per share, down from a high of $28 just four years ago. While a portfolio loaded with subprime assets may explain some reasons behind the drop, there’s ample reason to believe that corporate governance issues – with executive pay policy at the top of the grievance list – have also had a significant role to play in the company’s fall.

 

Sky-rocketing executive compensation makes it too easy to damage the reputations of much healthier companies. For these companies, the solutions include:

 

Link executive compensation to company performance. Nobody cares that CEOs work hard. At the same time, corporate pioneers such as Bill Gates, Steve Jobs, and Sam Walton have rarely been criticized for their own wealth, precisely because their good fortune was everyone’s good fortune. Results-oriented figures change the entire dynamic changes for the better.

 

Identify the metrics that best define performance. Too often, the only performance indicator that gets any attention is a company’s stock price. In fact, the best corporate managers actively seek the opportunity to be measured against an array of criteria. For example, have they provided excellent returns on invested capital? Have they strengthened the company’s ability to acquire other companies? Have they created jobs? By articulating those broader achievements, you paint a fairer, more accurate picture that, in turn, justifies generous compensation.

Avoid jargon. Investors, regulators, reporters, and consumers appreciate straightforward information, so give it to them. Attempting to mask pay practices in a cloud of legalese and statistics will heighten suspicion and jeopardize the trust of those the company depends on to survive.

 

Follow the rules – and stay under the radar. The best way to stay out of the news on executive compensation issues is to meet and fully satisfy compliance and reporting deadlines. Simply put, the less said, the better.