Exec compensation

Am I alone in thinking that something is broken when it comes to CEO compensation in North America? In my mind it all comes down to “symmetry”. Let me elaborate. Let’s imagine that Mr. Johnson is the CEO of Advanced Technology Corp. , a mid-size public company based in the Northeastern U.S. Mr. Johnson’s salary is $500,000 and his bonus amounts to another 100% of salary and is tied to profit and working capital targets. Additionally, Mr. Johnson has a million stock options on his companies stock.

Last year he strongly supported and fought for a $10M investment to be made in company whose technology was deemed to be valuable to Advanced Technology Corp. About two years later that same partner had became insolvent and the $10M was completely written off. It was determined that the decision to make such a large investment in such a partner, in hindsight, looked very risky. The partner had developed an early stage technology in a nascent market and had close to no revenue at the time the investment was made. However, knowing this, Mr. Johnson had urged the Board to proceed and he was instrumental in the original investment being made.

During the same two years Advanced Technology Corp. business continued to grow and meet its operating profit targets. As a result, Johnson achieved his 100% bonus during the same year that his investment decision forced a $10M write-off.

What is wrong with this picture? In my mind, it is the lack of symmetry of outcomes and responsibility. If I can be rewarded for my good decisions, should I also not be hurt by my bad ones? I am anticipating a response from someone who would point out that Johnson could not know all the facts and felt he made competent decision when recommending the $10M investment, but that he cannot be held fully responsible for the outcome. Good point. But then I retort, are we also sure he is responsible for the outcome of continued achievement of good profits? You cannot have it both ways.

I suspect that we will all acknowledge the limits to designing a perfect compensation system. However, “symmetry” is not a bad place to start as a guiding principle.