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Corporate Performance and CEO Bonus Pay

There are few issues in today's business environment that raise employee and shareholder concerns as much as CEO salary and CEO bonuses. This topic is of grave concern, especially in companies that report annual net losses and/or fail to meet their annual forecasts. From the perspective of employees, shareholders, and "average citizens", the concept of a multi-billion dollar company reporting a multi-million dollar loss while its leader(s) receive multi-million dollar bonuses is unsavory. For U.S. corporations that sought federal assistance, the notion of CEOs returning their annual bonus is under serious consideration. Hopefully, more research and analysis (on both sides of the issue) is done before a broad brush elimination of this vital leadership-incentive mechanism occurs.

The Business Case for Intervention - The Need for Change

More consideration must be given to how future CEO bonus pay is determined for three reasons. First, all of the components in CEO salary and bonus pay have not been shared. Bonus pay consists of more than the bottom line corporate results. Second, there is no uniformity or guideline for determining CEO salary or bonus pay (for example, one company may request only a percentage of a CEO's bonus for poor corporate performance, while another company may request a CEO's entire bonus for a bad year - and the former company performance is far worse than the latter company). Third, our free enterprise society has no appetite for limitations which would adversely impact our interpretations or freedoms that a capitalist economy provides. Perhaps, the underlying solution can be found in the organizational behavior of those involved in the process (i.e. corporate board members and the CEO), as well as a review of what are the desired results and behaviors attached to incentive pay and bonuses.

Corporate Accountability

The corporate board of directors is accountable for CEO selection, CEO salary, and CEO bonus pay decisions. The corporate board is also accountable for protecting shareholder investment. Research has shown numerous corporate boards are comprised of CEOs from other companies (but in different industries than the corporate board for which they serve). The time has come for more communication and explanation from corporate boards to address the dynamics of this phenomenon. Communication, or lack thereof, is the primary key for soliciting support, buy in, and acceptance of ALL initiatives in the corporate business environment. Open, honest communication, integrity, and accountability has forged to the forefront as required, expected behaviors and traits of our corporate leaders.

CEO Bonus Pay Components

I am not a CEO or a corporate board member in a for-profit corporation. However, I have conducted extensive research in the area of CEO selection in U.S. for-profit firms. Research has shown CEOs must possess three vital skills; and successful execution of those skills may result in bonus compensation. First, is the ability to provide and communicate vision/direction of the company. The CEO must clearly articulate the organization's mission to employees, shareholders, and the community at large. Second, the CEO must be able to run a multi-billion dollar corporation; hopefully, with year after year increased profitability and stockholder return on investment. Third, the CEO must be able to develop others - more specifically, the CEO must develop/groom their replacement. Significant leadership studies have found there is a shortage of corporate leaders. Corporate boards "incent" CEOs to develop a CEO successor in order to ensure long-term corporate leadership continuity and potential stability. This third skill has become an important part of the CEO role and their bonus pay.

All of the components of CEO salary and incentive are not typically shared. There are other factors that could be included. Further, the amount or percentage of CEO bonus pay attached to any of these activities is not public knowledge as well.

Whereas the concepts of incentive pay and bonuses for good corporate performance is viable, there is no justification for multi-million dollar bonuses for poor corporate performance. An initial prescription for resolution is to re-structure CEO bonus pay with a significant portion of the incentive pay based on corporate performance. In today's era of instant gratification, corporate profitability is the ultimate measuring stick. Hopefully, such a pay restructuring will provide CEOs who are in a tough spot to begin with (regardless of compensation) the environment to effectively carry out the other vital, critical functions of their role.

More information on the role of the CEO and the corporate board of directors can be found in Corporate Leadership Selection: Impact on American business, employees, and Society. As always, feedback and input to this blog is welcome.

Dr. Reginald J. Gardner