CEO compensation should be determined by reverse auction: the company selection committee identifies a list of acceptable candidates and then the position is awarded to the candidate who is willing to do the job for the least compensation. This will help manage executive compensation, save companies money, and ensure that jobs are taken by those most excited about the role.
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Executive compensation is out of control. By any historical measure the current ratio of compensation for executives versus average workers is at an all-time high. CEOs regularly receive multi-million-dollar compensation packages, signing bonuses, and options packages. Even termination payments for executives can be in the tens of millions—all while average household income in the U.S. hovers around $50,000.
The correlation of company performance with executive compensation or any other metric of “quality” is tenuous at best—witness the number of companies who end up paying out termination packages, as well as the turnover among executives.
The additional irony is that if these individuals were given the choice of these jobs versus something more menial (being a garbage collector, for example) if the two positions paid the same wage, nearly all of them would choose their CEO roles. They might even prefer a CEO job if it paid less than garbage collection. Executive roles and other powerful positions are attractive and interesting jobs for many people, regardless of the compensation they offer. This raises an alternative that could improve the selection of executives and lead to significant cost savings for companies and greater income equality in society: CEOs and other top executives of companies should be selected by reverse auction.
When a company is looking for a new CEO, the board and other stakeholders would begin by defining the criteria: what are the characteristics, skills, experiences, dispositions, and knowledge they are seeking in a new CEO? The committee also defines the initial structure of the job: location, duration, responsibilities, etc. These criteria and background information are then shared with the marketplace, and interested candidates apply. The selection committee for the company assesses each candidate to determine those who would be acceptable alternatives, and creates a list of viable candidates. A range of 3-10 candidates is optimal. These candidates are then invited to the reverse auction. The selection committee defines the starting offer, and then the reverse auction proceeds among the candidates, with the salary continuing to decrease until there’s a lowest bidder. When the winner has emerged, she signs the contract and is hired to start her new job.
This process would lead to much lower executive compensation, resulting in savings that would drop immediately to the company’s bottom line. It would also enable the company to clearly identify the individual who is most interested in the role—largely for the role itself rather than for the compensation package. Shouldn’t this be the reason that people take jobs in the first place?