A friend pointed me in the direction of a recent Financial Times article regarding executive compensation (We are overpaid, say executives, hat tip Mike Barnett). I’m officially blown away! You mean to tell me that there’s a constituency out there that actually admits to being overpaid? I don’t remember the last time I had a conversation amongst friends (or with anyone else for that matter) where the conclusion was that any of us were overpaid. And senior executives admitted to this no less?? Wow! Have I just been struck by lightening?

The article explains:

Most US corporate leaders believe chief executives are overpaid, according to a study. The findings – to be published today by the National Association of Corporate Directors – are likely to strengthen calls…for curbs on executive pay.

Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high, relative to their performance.

Fully 66% of executives think executive compensation is too high? C’mon now, is there really such a thing as a house that’s too big, or too many homes? Is there such a thing as owning a boat that’s too big, or too many boats? And don’t even get me started about airplanes.

To this point I still just couldn’t believe what I was reading.

Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”.

That’s it? Only 2.2% say that executive compensation is too low? I’d like to find those two executives (or one depending upon how many precisely completed the survey) to ask them why they think so. That would be a fun conversation.

There’s also a subtle difference between asking whether “executives” (in general) are getting paid too much or whether “I” (specifically) am getting paid to much. If I had to bet, the farm would be riding on the former.

That said however, I was not surprised by the responses of directors. They nearly uniformly agreed that senior executives are overpaid. This is consistent with conversations that I’ve had with directors at various corporations. The funny thing though is that it is one thing to recognize and/or admit that executives are getting paid too much. It’s quite another to do something about it. And as directors, they’re the ones in the best position to do something about it.

Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.

In all fairness to directors however, it is true that measuring executive performance is no easy task (see my blogs here and here and here). We are probably guilty of having lavished far too many options on executives at a time when we didn’t have a solid understanding of their ex post impact on executive behavior. As the article explains:

Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve.

There are some other good nuggets in this article about exorbitant exit pay and widening income gaps in the U.S., so I encourage you all to take a look. Nevertheless, after having read it, I’m left with only a couple of lingering, yet unanswered, questions. Precisely how long ago did executives come to the realization that they are overpaid? And now that they have finally recognized that a problem might exist, where do we go from here?

This entry was posted on Tuesday, October 23rd, 2007 at 2:53 pm and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.