Has CEO compensation destroyed trust in corporate America?
Will the real root cause of the destruction of trust please stand up. While many blame Wall Street and the financial meltdown in 2008, trust began to gasp for air many years earlier. The financial meltdown just added a nail to the coffin.
Trust had a quick descent in the 1990’s with the explosion of stock option grants and an increased focus on shareholder value. In fact, By 2000, stock options accounted for more than half of total compensation for a typical S&P 500 CEO.
Over the 14-year 1992-2005 time period, the average US S&P 500 company awarded over €1 billion worth of
options to its executives and employees (or €500 billion across all 500 companies). Moreover, the average S&P 500 company transferred through options approximately 25.6% of its total outstanding equity to its executives and employees (Murphy, Jensen and Wruck (2011).
And lest we forget the accounting scandals like Enron, Sarbanes Oxley, pay for performance, options backdating and Dodd Frank, perhaps sealing the fate of trust for good. Unfortunately, regulation is punitive and does little if anything to create value or trust. For those interested in read more about the global history of CEO compensation and it’s impact on trust, this is an excellent paper.
A more recent July NY Times article written by Eduardo Porter called Motivating Corporations to Do Good contains the following:
In 1993, some 20 percent of executive compensation was based on stock, according to Lynn Stout of Cornell Law School. Today, equity accounts for about 60 percent of the remuneration of executives at companies in the Standard & Poor’s 500-stock index. With so much money tied up in stock options and the like, it is not surprising that executives will do almost anything to give their share price a boost regardless of what costs this might incur after their options have vested. (and regardless of how much trust must be compromised along the way)
And finally, as described in this September article in The Week, written by James Pethokoukis, most US companies and their CEO’s are stuck in the short-term and quarterly earnings mentality, again both killers of trust.
The Silver Lining
In a recent blog post called The Good News About Leadership Bob Vanourek describes more enlightened versions of capitalism that are emerging and go beyond the “maximize shareholder value” mantra that is becoming increasingly obsolete and discredited. He references this article in McKinsey Insights called Redefining Capitalism.
Have We Yet to See Any Examples Of CEOS Embracing a New Way of Thinking about Trust?
Yes indeed! I wrote about the Top Ten CEO Trust Stories of 2014 in this recent post. It includes examples from enlightened CEOs like Howard Schultz at Starbucks and Capital One’s Richard Fairbank.
Perhaps there is still a ray of hope for trust to make a comeback in corporate America, but it won’t be through increased regulation and mandatory rules. After all, trust is voluntary. Let’s see what happens in 2015.
Our library of our own award-winning books and many others on building organizational trust can be accessed here and provide a good starting place for learning more about the subject, especially if you are an enlightened CEO, or want to be one.
Barbara Brooks Kimmel is the Executive Director of Trust Across America-Trust Around the World whose mission is to help organizations build trust. She is also the editor of the award winning TRUST INC. book series and the Executive Editor of TRUST! Magazine. In 2012 Barbara was named “One of 25 Women Changing the World” by Good Business International.
Copyright 2015, Next Decade, Inc.
Recent Comments