Friday, August 28, 2009

Ratcheting up CEO pay - or competing for talent?

If you were on the compensation committee of a public company board how would you set the CEO's pay?

There is so much written about fat cat CEOs and their unfair pay packages that this is a question worth pondering (if you care). The really hard part about it is judging what is a) fair, b) necessary to get the talent you want and c) the market.

One tool compensation committees use is the "peer group". This is the list of companies which are "like" your company. They are supposed to be similar in size, similar in market reach, something you can compare with to figure out what your CEO should be paid. But as the Wall St Journal points out recently, the very use of the peer group can cause CEO pay to ratchet up.

The problem goes like this. Most companies are planning to grow and want to have a CEO that can grow the company and make it larger and more competitive. As a result, they pick peer groups that while they have some companies that are smaller, many of the companies on the list are larger with higher paid CEOs than the current CEO - two studies cited by the WSJ confirm this. (The SEC only started requiring companies to publish their peer groups in 2006 so there is now enough data for the pundits and researchers to start to dig.)

At the same time, over 40% of companies cite that they want to pay their CEO's above market average - numbers like 60% and 75% of market are often used.

So, if your peer group is larger companies where the CEO pay is higher, and you want to pay your CEO above market, you will take CEO pay up. It's a compounding phenomenon.

Sounds like a conspiracy right? Well, sitting on two very quality compensation committees I can tell you from experience it isn't. It's a very real challenge for boards to figure out the right level of pay. High enough to attract a great CEO who can take the company on the growth journey you want (which takes both smarts and courage) and not so high that it hurts the P&L or creates too great a gap to other executives and the employees.

The good news is the peer group is just one tool we use. We also look carefully at internal executive pay to make sure we are not creating an internal problem, and more importantly at the job the CEO is doing and how he is conquering our strategic objectives.

Most senior executives' compensation is now made up of three major components - base salary, variable bonus based on company performance and some form of stock (options or RSUs). Having these levers allows the board to align the CEO's pay directly with the interest of the shareholders - as has happened to most tech companies over the last year there are few bonuses being paid because performance hasn't been there as a result of the recession.

Of course you do still see companies that offer their CEO compensation that doesn't seem very aligned to shareholder interest to me: use of the private jet, special healthcare, tax advice, golf club memberships etc - and even a key to the executive washroom. Something I don't understand but I guess I am an egalitarian when it comes to building company culture.

Wednesday, August 26, 2009

In person trumps telephone every time

I've had a couple of recent incidents where I was reminded, yet again, of how important it is to meet in person on critical decisions.

I say this in a context where today most of my daily meetings have some phone component. FirstRain is across three sites: San Mateo, New York and Gurgaon and so most of our meetings and discussions will have at least one person on the phone. So we have had to get good at it. And we use GoToMeeting a lot (if you use WebEx today - try GoToMeeting - it's much better).

But there are two (or at least two) cases where telephone dramatically reduces the effectiveness of the discussion.

First is interviewing. I have been hiring a new executive at FirstRain over the past few months and as a result meeting lots of interesting candidates. Several weeks ago I interviewed a candidate over the phone who seemed very strong. Smooth, articulate, smart and asked great questions. I was impressed and told the recruiter I wanted to meet the candidate in person.

When I did I picked up on the subtleties that you just can't get on the phone. A level of arrogance and self service that was in tone and body language, not in the words spoken. I could go on.... but won't.... needless to say I didn't continue.

For board members interviewing CEOs this is even more important - you have to look at "presence" and that cannot be detected over the phone.

The second case is board meetings. Technically as a public company board member you are considered to have attended a board meeting whether you are on the phone or in person and so it understandably happens that one board member or another is often on the phone because of personal or other business commitments. This happened to me this summer and I didn't like it. I was in the UK on a call to California for 8 hours and I found it much more difficult to participate and contribute at the level I like to in board meetings. I did my best under less than perfect circumstances.

It is particularly important to be in person when working on big issues like people or strategy. When I work on executive compensation in the Compensation Committee I always want to be in the room talking with the CEO. I want to watch his eyes, listen to his voice and figure out what problem he is really trying to solve. Likewise when I am working on strategy and positioning I want to be very interactive, able to jump to the white board and reflect what I just heard back to the CEO so we can test and then polish the concepts.

This summer's experiences have been a good in-my-face reminder. Some topics are effective on the phone but when it comes to people in person wins every time.

Friday, August 21, 2009

Cool technology: Samsung Sun Drive

After a 3 week hiatus from my blog (temporary brain cramp on writing) I am back and thought I'd start with the coolest piece of technology I saw thing morning when browsing (and QAing) our new research engine:

The new Zyrus Sun Drive - a thumb sized USB solar power supply! Just the thing for the nomad. We've used solar power packs for our devices when camping before - they are not new. What I find intriguing about this one is the size. It's a pocket size charger and sells for 29,000 Won or about $23 and claims more than 90 minutes of talk time - enough for your average conference call from the beach when you've worn down your battery working on email (which happens to me a lot).

Of course the truly useful product for me would be a battery powered iPhone. Today Samsung sells a good looking solar powered phone and I know I am not the only one with this need - Safaricom is launching a solar power phone service into Kenya made entirely from recycled materials (something I'll clearly need for my next major adventure) - but I confess I do love my iPhone and so hopefully Apple will one day add a sleek solar panel to it.

But if not - I may well switch phones to be fully express my nomad self.

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