Executive compensation is always in the spotlight. The pay levels for the highest paid executive can truly be astounding to “regular” people. In truth, they are often astounding to executive compensation professionals, including the consultants who make the recommendations. In general, most pay packages can be justified as being competitive in the market, or a small percentage of the value of the company or based mainly on the performance of the individual and/or company. This type of justification often rings hollow.
What if we applied some of the current “best practices” to nontraditional professions such as entertainment and sports? Dwayne “The Rock” Johnson is the highest paid actor of 2016. Mr. Johnson made about $64 Million in 2016. We have no specific data on his endorsements and other earnings, but $64M isn’t too shabby. Imagine if executive producers said that he could only make three times more than the next highest paid actor on the set. This 3x recommendation is often touted as a way to build better internal equity at corporations. Would the producers need to pay the other actors more, or would The Rock generously work for less?
The highest paid female actress of 2016 was Jennifer Lawrence at $46M. While only sixth on the list of highest paid actors in 2016, she still did OK. Imagine if she was told that 50%-80% of her pay would be delivered in three to five years. Now consider the reaction if each movie, and all her combined movies had to outperform at least 95% of the similar “tentpole” (big budget blockbuster) movies released that year. First, consider that the director and distributors of the movie, much like the market, have a lot to do with the success of an actor’s work. Now consider that her acting work may have been done two or three years prior to the release date.
Cristiano Ronaldo, the great footballer for Real Madrid, made $88M in 2016. Only $56M of this was from salary and bonus, so we can assume he has more than one income source. Imagine if the team had to report his pay ratio to the average footballer in Portugal (his home country.) Take it a step further and imagine that fans from around the world (not just his fans) could vote on whether the pay ratio was too high.
All the people above make more money than most of the people reading this article. The next 100 or more of the lower paid actors and athletes also make far more than the average HR, compensation professional, or regular Joe. Imagine the outcry from fans if some external governing body decided to create the rules and best practices mentioned above. Imagine the wailing from team owners or executive producers if they could no longer provide the pay packages that keep stars on their teams.
While nearly all agree executive pay has grown at a rate that may be hard to defend, it hasn’t grown at a rate that is difficult to explain. Companies want greatness. Shareholders want greatness. The difference between greatness and just being really, really, good is difficult to measure or define. But, greatness is the goal for all the above and every executive. You seldom hear a company state that it is recruiting for a CEO that is a very mid-level solid manager with limited vision and ambition.
As the reports about 2016 executive pay start to come through your news feed, remember that external rules and regulations are unlikely to help. Consider that Cristiano Ronaldo played on his national team for next to nothing. Jennifer Lawrence acts in “art” movies for far less than her standard rate. This is because those projects speak to their emotional side. Perhaps it’s time to look at new ways to inspire and engage our executives. What do you think?
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including a recent Performance-Based Equity Compensation issue brief. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation.