Fritz Teich

For some time now, CEO pay has been a lightning rod for criticism and
debate, but CEOs themselves have stayed pretty quiet on the topic—often
because it’s uncomfortable for us to speak out about how others are paid
and simpler to leave it to our compensation committees. Our
well-intentioned advisers—HR leadership, outside consultants and
lawyers, even board members—avoid the subject, fearful of sending the
wrong message to a high-performing CEO. So it’s time for CEOs to speak
up about unacceptable and inappropriate amounts and forms of
compensation—particularly since “say on pay” shareholder votes are on
the horizon. If we don’t take the lead, Congress and others will, in
ways that may be in no one’s best interest. Here’s what I propose:

Reward with equity.

Every element of a pay package should strengthen the CEO’s stewardship
of the firm, providing incentive to consistently create value over the
short, medium, and long term. It should align him with the company not
only when he is active but also in retirement, because the surest
measure of his contribution is the quality of succession and the
business’s performance in the year or two after he hands over the reins.
For this reason I strongly believe that equity should make up the lion’s
share of a CEO’s retirement package.

Restore integrity to equity grants.

Let’s also require that CEOs hold a meaningful portion of their
company-awarded equity into retirement. This sets an example by
affirming the company’s long-term values and culture for other top
executives. It’s painless—many CEOs already do it—but it underscores the
importance of the long-term health of the enterprise.

In some cases a CEO may have accumulated so much equity that additional
grants provide little incremental motivation. At that point the CEO
should ask the compensation committee to put those grants back into the
pool for other employees.

Eliminate post-employment provisions not pegged to performance.

So-called safety-net provisions such as outsize change-in-control or
severance payments and supplemental retirement plans are indefensible—as
are “mega equity grants” that are way out of proportion to the CEO’s
contributions. Stock options were never intended to be automatic. Their
purpose is to recognize extraordinary individual performance, to align
the CEO clearly with shareowners, and to encourage longer-term value
creation. A CEO who has amassed sufficient wealth to provide for any
eventuality needs no security blanket.
Implement more-detailed analyses.

A few years ago companies started using tally sheets to ensure that all
the components of an executive’s compensation could be seen in one
place. We should adopt two additional analyses: walkaway wealth
accumulation and internal pay equity. The first pulls together the total
wealth an executive will take with him under various termination
scenarios. Whereas the tally sheet is a front-end snapshot, the walkaway
provides a full picture, including the outcome of all the gains
(realized, unrealized, and projected) from all previous (and pending)
grants. The internal pay equity analysis adds up all the components of
an executive’s compensation going back several years, to determine
whether one of them may have distorted pay ratios.

Cynics may say, “Lafley can afford to talk this way because he already
got his.” In fact I had no employment contract, no severance, no
change-in-control payments, no gross ups, no pension (beyond stock from
a modest profit-sharing trust that all P&G employees participate in),
and no supplemental retirement plan, and 90% of my pay was at risk in
the form of restricted stock and stock options. I truly hope and believe
that if we as a group embrace—and implement—the tenets above, we will
have come a long way toward restoring public trust in our system of
democratic capitalism.