Companies & Industries

Bill George: Nonperforming CEOs


The public is outraged these days over CEO compensation, with good reason. Far too many chief executive officers get paid large sums even when they don't perform. I believe that CEOs should be well-paid when they do perform, but there is no justification for paying for nonperformance.

As a result, shareholders are demanding the right to approve CEO pay packages. Following the tradition of British companies, "say on pay" proposals on proxy statements are gaining momentum in the U.S. But under U.S. corporate law, determining the compensation of CEOs is a fundamental responsibility of the board of directors. Directors are charged with the fiduciary duty to use their "business judgment" in these matters, and the courts have consistently backed them up.


Home Depot, Hewlett-Packard Handouts

If this were to happen, who would determine these complex compensation packages? The courts? The Securities & Exchange Commission? External governance gurus, who have no responsibility for the corporation's performance? None of these alternatives makes sense. In fact, they threaten the very foundation of our system of governance.



Taking a Toll on Employee Motivation


Is it surprising that outsized CEO pay packages destroy employees' trust? With loss of trust, employee motivation gives way to to cynicism and superior performance becomes mediocre.

The underlying cause of this problem is the failure of boards to develop their future CEOs internally. The board's most important job is to ensure long-term succession plans for the top leadership. But many boards don't take the time and expend the effort to develop seamless internal succession, and consequently they are forced to search outside the company, often yielding to investor pressures to hire a corporate savior.

No CEO Contracts at General Electric

In turn, these high-profile CEOs from outside the company who know little about the business, the company's culture, or its people, hire high-powered attorneys to negotiate multiyear contracts that guarantee their compensation, regardless of performance.

Why do CEOs need contracts in the first place? The CEOs of General Electric (GE), Goldman Sachs (GS), and Exxon (XOM) don't have them. They get paid to perform.

Executive compensation should be tied directly to the company's long-term objectives and based on building the firm's economic value, not its stock price. The best compensation programs tie up half of the executives' compensation for the duration of their tenure, so they cannot cash out when the company's stock peaks. These programs are based on a mix of short-term and long-term incentives so that no one objective can be pursued to the detriment of the firm's interests.

To ensure the CEOs' separation from the compensation process, boards should hire their own compensation consultants who do no work for management.




George, professor of management practice at Harvard Business School, is the author of two best-selling books, True North and Authentic Leadership. He writes his "True North" column every other week at

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