Myth of ‘superstar CEO’ driving excessive pay: Report

When it comes to compensation, the myth of the “superstar CEO” continues to drive excessive pay, as companies are desperate to attract and retain top talent — even if it doesn’t always lead to improved corporate perform23ance and they have other options.

That’s according to a report out of the United Kingdom that delved into the weak spots of compensation committees and executive pay, along with making recommendations for improvement.

“There’s some kind of belief that if you are paying your chief executive top dollar, they must be the best. And, therefore, it sends a message out to investors that you’ve got right person for the job — even if that person doesn’t necessarily deliver,” said Charles Cotton, senior adviser for performance and reward at the Chartered Institute of Personnel and Development (CIPD) in London, U.K.

“The success of the organization seems to be attributed to achievements to one or two individuals at the top of the organization, and what we believe is that increasingly success is linked to… individuals in the whole organization — it’s a collective endeavour.”

“If you just focus all your rewards on a few people at the top, then the people in the rest of the organization after a while see this as unfair because they’re working very hard and they’re getting very moderate pay rises and bonuses whilst those at the top are getting significant pay rises and bonuses.”

There’s no doubt there’s been an inflation of compensation, especially since details of remuneration for top executives has been published annually, said Yvan Allaire, executive president of the board of the Institute for Governance of Private and Public Organizations (IGOPP) in Montreal.

“They thought it would shame people into not being so greedy — it did exactly the contrary. It gave a basis for comparison: ‘If so and so was paid so much, and that company is smaller than our company, why is he paid more than I am paid?’’’ he said.

“Of course, it’s been used by consultants as the basis to set remuneration… that’s the weak link but (companies) can’t
can get out of it because they’re afraid they will lose key people.”

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Most compensation committees are highly dependant on external consultants, said Allaire.

“They’re the ones running the numbers, doing the simulation, suggesting names of comparable companies. They come to the board with the thick document which has all of that… and there you are, you’re supposed to be informed enough, knowledgeable enough, experienced enough to start challenging,” he said. “People will question this and that but, in general, the dependence is pretty high.”

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