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Company boards are waking up to the need to take a hard look at executive compensation due to pressure from investors. The Wall Street Journal examined executive hiring on a budget and noted that many company’s never set a realistic price on hiring top managers.
Former Tupperware CEO Warren Batts, who also serves as an adjunct professor of strategic management at Chicago GSB, is quoted in the article. He pointed to a key reason for excessive executive compensation. “Show me a company that does a poor job of succession planning, and I’ll show you a company that probably has excessive compensation.”
Why? External candidates require a financial incentive to leave a good job. Studies show they can cost 20% to 30% more than internal candidates.
One method developed to help companies keep an eye on the bottom line with executive hiring is a tally sheet. The sheets cover all aspects of compensation including severance and stock options. They also can provide an array of pay scenarios taking into account changes in retirement plans or performance pay.
Better managing potential executive pay is just a part of the solution to excessive compensation. Developing strong internal candidates is another part of the puzzle. Batts, active on a number of corporate boards including Allstate; Sears, Roebuck and Co.; and Sprint, generally prefers internal candidates when filling a position. He “likes the devil you know versus the devil you don’t know.”
"Executive Hiring on a Budget" appeared in the Wall Street Journal on January 19, 2006.