Pay for Play

August 2007
Tennessee Business Magazine

COMMENTARY

We've all read the news articles about greedy CEOs earning huge incomes while other constituents suffer, about signing bonuses without performance clauses or about golden parachutes for the incompetent. We read about outsized egos, free private aircraft travel, club memberships, greed and more greed. It's enough to make one sick.

I was the chairman and CEO of a public company for a dozen years and have a simple approach when it comes to executive compensation: Pay me for results. If I produce good results for my stockholders, pay me well. If company performance is fantastic, pay me still more. But if performance is poor, I should suffer just like my employees and stockholders.

Several years ago, our profits fell below the previous year — my bonus was zero. I made sure everyone in our company knew that. Another year, the Board granted me a raise in excess of what I thought I deserved, so I returned two-thirds of it.

CEOs have much more impact on company results than anyone else. CEOs set the direction by making the final decisions on high-level strategy. They make final decisions on the choice of senior executives. They set the moral compass and are the chief architects of the culture. They are responsible and should be held accountable.
 
We all expect pay for performance, but how do we define and measure CEO performance? It varies by industry; generally the criteria are revenue growth, profit growth, use of assets and stock performance. Performance measures vary with the longest-term measures for industries where lasting capital investment has the greatest impact. Stockholders elect Boards of Directors who are responsible for setting CEO performance measures.

When financial measures are positive, the stock price generally follows. Pay for performance is a fairly simple calculation. Include a degree of humility and frugality, and the CEO will do well without being called "greedy."

But when financial measures and stock price move in opposite directions, the Board must apply common sense logic. CEOs should not be rewarded for a rising stock price when the business is not doing well. But should CEOs be penalized for a weak stock price with solid financial results? Again, the Board must exercise its clear responsibility to do what is in the best long-term interest of the stockholders.

We can pontificate all day long about executive compensation abuse, but recognize that stockholders elect Directors to the Board. And it is the Board that has absolute authority over CEO compensation.

If you are an unhappy stockholder, take action. If you think the CEO is overpaid for the performance of the company, then call, write, e-mail or blog. Challenge the Board on the selection and compensation of the CEO. Marquee CEOs have high failure rates. In general, seasoned executives who have time with the organization have the highest success rate. Read the proxy issued before the annual stockholders meeting. New SEC rules now require full and clear disclosure of executive compensation. Most boards will sit up and take notice when stockholders speak up. We must hold our boards accountable whenever they decide to grant outrageous wealth to executives, particularly in cases of weak or non-performance. Board accountability is the path to reigning in excessive executive compensation.

Joe Scarlett is the retired chairman of Tractor Supply Company and the founder of the Scarlett Leadership Institute. He can be reached at 
joe@scarlettleadership.com.

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