Compensation: Lost In Translation

Aug. 24, 2005
A global marketplace means fewer premier posts for U.S. manufacturing executives, but the best of the best still will be in demand and highly compensated.

It's all in the translation -- at least in terms of executive compensation and its global spectrum. U.S.-based companies no longer will grant the same executive options across the globe. Instead they are looking at local markets, local economies, local cost-of-living expenses and performance to determine c-level pay. Recent corporate scandals and subsequent criminal and regulatory rulings have made certain of that.

Additionally, some analysts say globalization will bring further transparency to executive performance globally. This means that overall performance will mean more than stock-value growth, and eventually we will live in a land of truly qualified executives. Or at least in a land where executives are paid based on the short- and long-term value they add to their companies.

"The new gold standard is 'pay for financial and operating performance,'" according to Steven E. Hall, president of New York-based Pearl Meyer & Partners, a compensation consulting firm that earlier this year released a CEO compensation survey that it conducted for The New York Times. "Stock price movement is no longer the primary measure of success. When executive pay goes up, shareholders want to see evidence of annual results and long-term business growth that increase the value of their own equity interests."

According to the Pearl Meyer & Partners' survey, "CEO compensation at U.S. companies rebounded in 2004, rising 13% to $10 million under a new pay construct focused on corporate performance."

In fact, of the 179 companies that responded to the survey, "bigger paychecks coincided with an average 33% increase in net income and a 20% rise in total shareholder return."

Ultimately, it will be the grand scale of the executive talent pool that will dictate executive compensation. And the global scope will bring with it much talent that isn't used to exorbitant pay.

"If you think back, it was the U.S. that was the poster child for those sorts of excesses -- where the CEO would make 200 times the amount of somebody at the midlevel of the company," says Chicago-based Scott E. Kingdom, senior client partner and global managing director of industrial markets at Korn/Ferry International, a human capital consultancy based in Los Angeles. "That huge gap doesn't exist anywhere else in the world. The Europeans look at us and shake their heads. The Asians look at us and shake their heads. Their systems don't allow for the huge gap."

Although, according to Carl Weinberg, principal, total compensation practice at PricewaterhouseCoopers' LLP, "[Globalization] is not bringing compensation levels down in the U.S. It's raising compensation levels elsewhere, which is typically what happens when markets expand like that because people are buying executive talent at the spot market."

Indeed, according to a 2003 study "The Effects on Internationalization on CEO Compensation," authors Lars Oxelheim of the Lund Institute of Economic Research, Lund, Sweden, and Trond Randoy of Agder University College and Agder Research in Norway, found, "Countries with a relatively low level of CEO compensation can expect to see higher compensation levels as their firms go international and they become integrated into the global market for top executives."

PwC's Weinberg notes the trend is driven by two factors: the globalization of the labor market and cross-border acquisitions.

"When a German company acquires a major U.S. company, and the acquired CEO makes more than the acquiring CEO, the acquiring CEO is likely to notice that and start to raise questions. It's the impetus behind the idea of one world market."

Another compensation trend: global relevance. Executives that can be relevant in Asia or Europe, or have lived abroad, will increase their earning power.

"This is such a new landscape, that pressures to attract those folks and retain them is high," says Korn/Ferry's Kingdom. "That definitely drives compensation because it is a more dear commodity today."

According to a February 2005 PricewaterhouseCoopers' Trendsetter Barometer, which queried CEOs from 355 privately held product and service companies, "80% of the CEOs view today's market for executive talent as competitive, including 24% who say it is highly competitive. Under these circumstances, to attract, retain and motivate employees, 91% of surveyed companies offer incentive-based compensation programs, almost all with a cash component."

And would it behoove American executives to be able to speak other languages? "You better believe it," says Kingdom. "I had this conversation with my 14-year-old daughter. She is scared to death that I am serious when I tell her I want her to take Chinese in high school. . . . The rest of the world is so comfortable with multi-languages that it really puts the U.S. executive at a disadvantage."

Best Practices Emerge

Global best practices in compensation are evolving. "Global companies are looking across borders for best practices so that they can prepare themselves for more fluid movement of pay -- where global boundaries or actual boundaries really don't matter much at all," says Bill Strahan, senior executive compensation consultant with Mercer Human Resource Consulting.

For example, incentive compensation is a much higher proportion of the package in the U.S. than in Europe. "Companies are asking is that appropriate, or do we want to bring our incentive programs closer into alignment around the globe?" adds Strahan.

U.S. companies must also address the alignment question. According to Strahan, Europe is ahead of the U.S. in terms of connecting pay for performance. However, "Most people would probably tell you that the U.S. is the most sophisticated in terms of all the things that one applies for compensation," says Kingdom. "As European and Asian businesses begin to compete for executives that are outside their normal gene pool, and if they are going to come to the U.S. and attract people who have been in a U.S. business environment, in order to get those people, they will have to meet or exceed the best other scenario that person would have."

Substance Trumps Style

Not very long ago, style, charisma and camera appeal carried the day for a lot of CEOs, explains Kingdom. "The imperial CEO or Rock Star CEO is just not as intriguing anymore. I think track record of success is what really matters."

According to Mercer's Strahan, many people are still star-struck. "Companies are trying to find the absolute best talent that they can, and they are looking broadly. But they are still expecting that one superstar person to appear. The compensation levels still tend to be driven by what the market will bear for that one person."

However, PwC's Weinberg says that there is less willingness to go way outside of the bounds of competitive range as opposed to several years ago when there was a greater belief that the "star CEO could turn around the company and generate enormous shareholder value."

While the Rock Star CEO may be last year's fad, the globe-trotting lifestyle remains in fashion. According to Strahan, CEOs must enter the stage of fluidity characterized by a great deal of movement of executive talent around the globe.

"Smart companies and leading-edge companies are already making sure their executives have greater global exposure. How will that impact compensation levels? I don't think that you'll see the U.S. moving down to meet some global average. I think what you are going to see is the best and the brightest -- regardless of where they were or where the beginning stages of their career occurred -- finding themselves in executive positions where they are used for maximum gain for shareholders. And that also means that the price tag for that person is going to be larger."

In terms of the outlook for U.S. executives, Kingdom advises them to look at the industrial machine that was the U.S. and the industrial machine that is becoming global.

"Take a look at what globalization can mean -- it isn't pretty. You are no longer the only game in town.

"It takes some real savvy and sophistication and confidence to stay ahead of that global curve. I think the number of opportunities for high paying executive jobs will be less, and probably never return in the way they were in the U.S. However, the ones that remain may still be very highly compensated."

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