57. Does Your Board Really Understand Your CEO's Pay?

What this episode covers

SCRIPT: Sometimes I meet organizations where the board, I’m sorry to say, is pretty out of the loop when it comes to CEO pay. In some cases the organization is a not-for-profit or co-operative where no board member has ever held an executive position so they rely on the CEO to help them understand what compensation levels and types are appropriate. In some of those boardrooms, I even hear conversations along the lines of “well *I’VE* never made that much money so why should our CEO?” On the surface that’s a really cool provocative question, but if we start off with an emotional response we’re more likely to get distracted from actually getting to the right answer. Even in some of the larger private sector organizations I meet, boards defer to their compensation consultants when it comes to the important nuances of multiple time horizons, or perks, or tax implications for their CEO. So why does any of this matter? Nearly fifteen years ago I created a basic stress testing tool to see what would happen to a given CEO’s take-home pay under different performance scenarios over time – especially for equity-based pay mechanisms like options and restricted shares. It turns out even small variances in share price can cause pay outcomes to sway wildly away from the targets the board set. And that might be just fine! But I feel better about it when the boards – you know, the ones setting and approving CEO pay – are the ones in the room who understand it best.