Multi-Dimensional Executive Compensation

Originally posted December 2014

In their December 4, 2009 article, How much should Goldman pay its CEO? published in Money.com authors Antony Currie and Rob Cox say “Figuring out the right level of pay is hard, though. For starters, while Goldman is on course to earn almost $11 billion this year, it has done so in part on the back of myriad taxpayer-sponsored and funded programs to kick start capital markets.”  We certainly concur with that statement: the process of determining executive compensation - and especially the compensation for the CEO - requires a thoughtful, reflective and operationally sound approach.  What surprised us was the authors’ further observation that “The right number may be somewhere around $20 million.”

To that we say: “What?”

It appears they make this leap based on the fact that Blankfein is “worth more than the $11 million or so average payout of an S&P 500 boss -- and a premium to the $9 million that Robert Benmosche is to receive for running government-owned AIG.”  So rather than try to  link a CEO’s pay to the company’s business strategy, the authors would simply benchmark Blankfein as about 45% better than average and 55% better than Benmosche?

The authors then go on to say “…in a nod to concerns about limiting short-term incentives, Goldman could pay 90% of that in stock.” So again rather than design a mix of rewards (cash and stock) that drives the right behavior, they base the cash vs. stock percentages around public sentiment.  That kind of bogus “benchmarking” is a stretch we haven’t seen before.

Certainly benchmarking is and should be a tool in the toolkit that boards and consultants use to help set CEO pay. But Grahall sees it not as the only or even the primary tool in determining CEO pay.  Benchmarking only addresses “money”, it misses the very important aspects of the “mix” of rewards and the “messages” those rewards are sending.  Grahall’s approach to designing executive compensation programs is a total rewards strategy approach, using money (the level of rewards), mix (the allocation of rewards among salary, inventive, benefits, etc) and messages (how the rewards drive desired business outcomes) to help a company structure an effective rewards program that links rewards to its organizational and business strategy.

Perhaps if Goldman’s executive compensation strategy considers only the external environment, as the article’s authors have done, $20 million might be the “right” pay.  However we believe that when executive compensation is analyzed in a more balanced way, considering the environment, stakeholders, shareholders, business strategy and people strategy, a different number would emerge as “right”.

We agree with the authors when they say: “Blankfein's take… will also set standards for Goldman's other top executives.”  In fact the CEO’s pay does influence and create a “pay cap” for other named operational executives. But to create an appropriate level of pay for the CEO, with an appropriate relationship of compensation among supervisors, subordinates and peers, one cannot take a simple “linear” or hierarchical approach.  One must consider all the compass points. 

Perhaps most important, when determining CEO pay, one must consider long term performance and wealth accumulation.  Annual incentives might be a small part of overall pay when long term wealth accumulation is considered.  And in fact, Grahall emphasizes this long term view as the most important part of the methodology we use when performing these types of assignments.

In their book Effective Executive Compensation, Grahall partner Michael Graham outlines a wealth accumulation plan that links long-term wealth accumulation directly to performance. Called the Grahall Performance-Based Wealth Accumulation and Retention Plan—or gPB-WARP—this revolutionary plan, unlike traditional retirement or stock option plans, is designed so that a portion of the executive’s total reward program and ultimately his/her wealth accumulation rewards are based on company performance, stock performance, or a combination of both. These plans go beyond the “alignment of shareholders” and effectively combine career incentives and defined contribution retirement plans with deferred compensation awarded only when the corporation beats the competition. These plans ensure that exceptional retirement income is reserved for only those executives who perform exceedingly well and whose companies succeed as a result of their efforts.

Regardless of the final decision on Blankfein’s pay, there undoubtedly will be some in the crowd who will be unhappy about it. For some, the number will be too high, for others perhaps not high enough.   The thing we hope most is that Goldman gets the money, the mix and the messages right.