 Good afternoon everybody. My name is Mike Hanley. I work here at the World Economic Forum. We're here this afternoon with a very interesting session with a very provocative title called Ending Executive Pay. We'll have to see by the end of the half hour whether we actually have ended executive pay. I'm going to ask my guests to introduce themselves please if we could start with Rajiv please. I'm Rajiv Vasudeva and I'm the CEO of Egon Center. We're a global leadership advisory firm and as you can imagine Mike, this is a very interesting topic for us and we deal with it every day. Indeed. Hi, I'm Aaron Kramer. I'm the president and CEO of BSR. We're a global nonprofit business association focused on sustainability, working with our companies around the world to integrate environmental, social and governance considerations into everything that they do. Great. So we have clearly two very different ends of the spectrum or at least different parts of the circle. I'm going to be looking at my digital devices a couple of times through the session. That's not because I'm checking my emails, it's because we're going live on Facebook and so I'm going to put a call out now please, questions and comments from our Facebook live audience. I will integrate them as we go through the session also. We'll come to our live audience here in Davos for some questions. Okay, the first time I'm going to look at my device is to actually read out some statistics that many of you may be familiar with and they're kind of horrifying if you sit back and actually think about them. CEO pay in the U.S. has grown exponentially since the 1970s. According to the Economic Policy Institute, CEO pay has risen some 1,000% compared to a rise in worker salaries of roughly 11% over the same time period. Adjusted for inflation. I mean that's quite 1,000% versus 11%. And then 20 years ago the average CEO was getting around 45 times the pay of the average worker in the business. Today that ratio is around 130 times. That's a remarkable increase in executive pay. Rajiv, you deal with it every day. Why are CEOs getting paid so much more relative to everyone else? Yeah. So maybe I think I just comment on the statistics because I think executive pay is a very difficult and complex subject. So I think the statistics that you quote are very much related to large public companies because most of this data that's published is for the S&P 500 or for the bigger companies around the world. I think we also have to remember that almost 60 or 70% of the world economy is actually private. It's not represented in these numbers that you've spoken about. If you put those numbers in and looked at the averages, they wouldn't be as staggering as the numbers that you've just talked about. So I think just to put it in perspective, there are lots of private equity firms and family companies that also hire CEOs and they have their own distinct methods of how they pay their executives. It might be worse if you include the price. Yeah, sometimes it could be worse and sometimes it could be better. So what I'm saying, it's just a complex subject. It is indeed. But I think if you look at, I think compensation, I think it's also important to look at, you know, are we talking about fairness or are we talking about effectiveness? And to my mind, effectiveness is about, you know, are we paying our executives more than their worth? So I think the question always goes back to who do you ask whether compensation is excessive or not? Is anyone worth a million bucks a day? You know, interestingly, if you ask boards and CEOs, almost 80 or 90% of them, they're just a recent survey being done. 85% of boards and CEOs feel that they are actually paid appropriately. 130 times more than... I'm just giving you the statistics. Okay. And I think the question is, does leadership matter? And I think, you know, does that therefore justify the kind of differential that you're talking about? There's also research to show that 40% of the variation in the value of a company in the same industry kind of relates to the CEO or the leadership. So between 25% to 40% can be explained by good leadership. Now the question is, if a CEO can increase the value of a company by 100 million, what would you be willing to pay? Private equity firms are willing to pay up to 1% to 5%. Also surveys show that the public feels it should be 0.5%, whereas CEOs think it should be 1.5%. So I mean, if you just look at that, if you looked at it in over the tenure of a CEO, if you increase valuation by a couple of billion, maybe you could be worth a few million, but that's one. But I think when you talk about why compensation has risen as fast as it has, a lot of this goes back to the debate in the 80s and the 90s when there was this big issue about are the manager's interests aligned with the shareholders' interests. So this whole agency concept that we have in the western world or in most parts of the world, capitalist part of the world. And the idea was that if you want to incentivize management to have the same interests as the shareholders, then you've got to link it to performance. Sounds all very logical. And that's exactly what happened. And today about 60% to 70% of the CEO compensation for the last 20 years has been stock-based. And you've seen what's happened to the stock market. So we've kind of, I don't know if you remember the Wall Street movie, but if you remember Wall Street, you know, Gordon Gekko told us, you know, how we got to live our lives. And a lot of this compensation increase has come through what's happened into the stock market. We've had the best run in the stock markets over the last 20 years. So a lot of this is driven by that. Another interesting part, Mike, would be well-intentioned transparency on compensation. We see that every day. Intended to be to actually, you know, maybe bring some sanity around compensation. But what transparency has done is it's ratcheted up compensation because if I'm a CEO and I know what the other top CEOs are making, I don't want to be in the bottom half or the lower half. I want to be in the top quartile. So pay has become more a status issue rather than necessarily the absolute number. So I think that's another aspect. And of course, I think there's the whole issues around it's a global, you know, kind of talent war that's on, talent is much more mobile. There are huge cultural differences in compensation. The U.S. is far ahead of, if you look at the Scandinavian countries. So, you know, there's a cultural difference. The U.S. average CEO compensation for S&P 500 is 16 million, whereas in Scandinavia it's 1.3 or 1.4 million. So even within countries with, you know, there's a huge dispersion. So it's also culturally what you expect and what you're willing to pay for. America is a very much a meritocracy culture. It pays for performance. Scandinavia has gotten much more a socialistic culture and therefore it's much more egalitarian. So I think there are lots of these issues. And I think finally maybe the last point that I want to probably talk about is that the job of the CEO has become much more difficult. It has, I mean today we find it's much more difficult to find the right leaders. Industries are getting disaggregated. The stakes are becoming higher. Technology and globalization has allowed companies to control huge amount, their concentration of wealth in a way. I think there was a topic that was being discussed in one of the forums where 10% of the companies actually produce 80% of the profits of the world. And it's likely to get even more concentrated as we go forward. So the stakes are extremely high. And there's less security in the CEO role today. 10 years have become shorter. And very often, you know, CEOs could be out and it's almost like paying danger money to bring a CEO in because you don't know how long you're going to be doing that job. So there are a number of factors at play. Okay, so transparency in competition, globalization, complexity of the working environment, these are all powerful forces. What possible countermeasures could society impose, Aaron, to fight these forces which have clearly created these very inequitable situation? So let me come to that and talk a little bit about the context as well. You know, in entering into the discussion, I was, in thinking about this discussion, I thought back to my time in law school, and some trains a lawyer, and in law school, one of the tests that gets applied when you look at a particular case is, sorry, this is sexist, but it's the reasonable man test. What would the reasonable man, what would the average person, I think in the U.K. is the person on the clap among the bus, what would the average person think? And the complexity that Rajiv just spoke to, all of that is true, but there's a real problem because the average person, the reasonable man looks at these numbers and says they don't make sense. No person is worth that much if you look, and one of the points I want to make also is that executive pay might make sense where it is now in its own universe, but people think about it in the context of what the rest of us, we're not CEOs of publicly traded companies, are experiencing. And since the financial crisis in every single OECD country, if you look at employment, the middle has hollowed out. So massive job loss in middle income jobs in every OECD country, growth in lower income jobs and growth in higher income jobs. So when the middle is hollowing out, I think sustaining the public support and frankly the support of employees for big pay packages is very, very difficult. Now CEOs are not the only ones to experience this. We live, and I do think the United States is probably responsible for this, in a winner-take-all society. So we could ask the same question of athletes, of entertainers, even the rare author I suppose, who can take home a massive amount of money, and there's a very small stratum of people who are able to do that. So we live in a winner-take-all society, and I think that plays into this as well, and I would argue that it doesn't really make sense. So what are some of the answers to get to your question? Sergei, if you talked about does leadership matter, and of course leadership matters, I would pose a different question, what constitutes leadership? And I think given the times that we're in, that a CEO, as some have done, a small number, would say I'm only worth so much. You know, Paul Pullman is someone who gets cited on almost every issue under the sun, and he is one example who says he makes a great deal of money more than he needs. He's sort of capped his compensation. But we don't see many examples of that. I think we've been through a very, very rocky period financially, very, very volatile. And the examples of chief executives who have said I'm not worth this much, I'm not going to take more, et cetera, et cetera, a few and far between, and in fact what's really alienated the public is when CEOs who presided over companies that have had really terrible circumstances have also taken home very big pay packets. And I think that's a failure of leadership to be blunt. And I think that to the degree that people think that the economy is rigged, this is one of the reasons why I think they do. Now, one of the things that I would suggest as an alternative is coming up with some new ways to create incentives. You know, the work that my organization does, and look, we work with the biggest companies around the world, the very same companies that Egon Zender works with, and a lot of boards are beginning to tie compensation, particularly incentives, to performance on environmental, social, and governance questions. How is a company doing in reducing its carbon? How is a company doing in terms of workforce employee engagement? A whole range of things that represent more of a blended value model that I think speak to the long-term value that a company creates. And that's something that I think holds some real promise, and it really ties chief executives, performance, and other executives, by the way, to the longer-term value creation and factors that are tied more directly to the social license to operate, which is precisely the thing that's placed at risk when people believe that CEO compensation is spiraling out of control, which a lot of people believe. So your point earlier about the good examples of CEOs, if it's a failure of leadership, who are the leaders that have shown the way? And we have a question here from Facebook, from David Solomon, Michael Budimar-Gono, who asks, some CEOs take a $1 salary. The session's called Ending Executive Pay. Perhaps we're not suggesting that we should actually end it. Are there some examples of really some CEOs who actually have taken leadership in this role, Rajiv? So I think Warren Buffett is a famous example that's quoted all the time, and he probably has created a huge amount of value. But I do think, coming back to the point that Aaron made, I think compensation or executive pay is a whipping boy for a bigger issue that's playing out. To my mind, it's the inequity, which is creating fear and anxiety, and you need some kind of whipping boys or a whipping horse. And executive pay is definitely one of them. But I do feel in the work that we are doing with companies now, what we are talking about is not how much to pay or how to pay, but who to pay to. And I think that goes back to your point about what does leadership look like in this new world? Because I think there's a need for a new social contract. You do need, there is, I think you probably have seen it was released at Davos, the Edelman Trust Survey. Trust is even lower now than it ever was before. I think on every category, in every type of business. So I think there is that anger that needs to be addressed. I think there is a social responsibility that businesses have, and business leaders have to be able to address that. I think there's also a big role for boards, which I think they have not been doing a great job at. Because I think this whole process of boards actually living the values that the companies stand for is very, very important. The role of the board is not just to be talking strategy, there also should be the guardians of the values. And they need to be making sure that companies are socially responsible. And I think that needs to be reflected in the right composition of the board. It needs to be reflected in the debate that boards have. It should be reflected in the independence that they bring to these discussions. And I think, even though I work for an executive search firm, we are working for our clients very closely to look at working on internal succession options two, three, four years in advance, so that you can then be elevating leaders who demonstrate these values. These are leaders who demonstrate purpose, believe in purpose, in collegiality, in having kind of a social sustainability as an objective. And really looking at how do you make a difference which is more above just compensation. So I think it's really about the who. And we've got to change the conversation about how do we get more responsible leaders into the right kind of roles. If I can just pick up on that. I think those are very good points. And so to go back to the statistics you cited about how much of the value creation can be attributed to CEO and how much should the CEO benefit from that, I think that question I would almost put to the side and say that if a CEO is starting the company in a way that allows all the people in the company to be able to share in that as well, then I think the question of CEO compensation becomes a lot less important because at the end of the day I don't think this is really a question about corporate assets with some exceptions. There are cases at the far end of the spectrum and so on. But that's not really the issue. It's not so much who captures the value that a CEO helps to create so long as everyone inside the company is able to participate in that as well. And I think the CEO who makes that a priority will have very little question about his or her compensation regardless of what it is. The fact that most company employees don't feel that that's happening is creating a lot of the questions which I think are not economic at the end of the day. I think these are questions that are symbolic questions. They are moral and ethical questions to a certain degree, but they're not economic. And so I think the real question is how does employment, not only the social contract with government, which you pointed to, but what's the deal that a company engages in with its employees? I heard a great story this morning about AT&T, which has basically said we believe in lifelong learning and we want people to be able to thrive at our company for a long time and we will help you do that. The deal is you've got to keep changing and improving your skills. Those kinds of deals create the kind of loyalty that I think provide the space. Well, let me put it this way, probably reduce the questions about executive compensation because there's opportunity for everyone and that's really what people want. People don't want to punish CEOs. That's not the point. People want to be able to feel that they've got an opportunity to make the most of their career as well. And that their contributions are likely to be recognized. Mike, the other interesting kind of statistic, I don't know if you picked this up in the analysis that you did, is that there is actually no linkage between compensation and performance. So CEOs that make more money don't necessarily deliver better performance. So American CEOs make a lot more money than their European counterparts. But they don't necessarily perform better than European CEOs. And we've been doing a lot of work and research and we're working with Linda Hill who's here actually at Davos on innovation and how to drive innovation and growth in companies. And the conclusion that we've come to is that innovation is a collective sport. It's not an individual sport. And to be able to drive innovation in organizations which is at the grassroots level, it's happening at the call phase of customers, you need to start thinking about collective compensation mechanisms rather than individual compensation mechanisms. So to your point about it, it's not just about one leader. How do you bring a larger part of the organization into the compensation scheme rather than thinking about it just as individually this person is responsible? Because today we're kind of in operating in a world where individual leaders are not able to make the kind of difference that they could maybe 10 years ago, 15 years ago the world is too complex. So I'd just like to check on there. We've taken a question from Facebook wondering if there's anyone in the room who'd like to give us something. Hi, I'm Huining Tsao from Chiang Kong Graduate School of Business. I'm a professor of finance. So I'm kind of interested in this exact pay. My question is, are there any strong evidence that actually there's strong linkage between performance and compensation? Because alternative hypothesis would be just what elite because people sitting on the board and people like CEOs, they're all powerful elite. And then they just give out these compensations because they just want to kind of award each other. As you mentioned, compared to Japan, Europe and US, there's like a huge range of exact pay. I don't know whether the US has really done a better job than Europeans or Japanese, so it's not so clear. Second is even if there's like strong evidence for linkage between performance and the pay, is that a socially kind of stable outcome? Because suppose that in the long run there's 1% of the people have 99% of the wealth. It's a very unstable society. So is that the way one would go? Because if one guy has all the wealth in the whole world, then it's very dangerous for that guy as well. So I think everything that you said I would agree with. I think the issue around performance and compensation is the kind of situations that we get very aggrieved about is when compensation is increasing and performance is going down. I mean, those are the kind of egregious cases that we look at and we all get completely angry about, here the company's values come down by 10%, why is the CEO's compensation going up? Bob Dudley in the last meeting, his compensation was being increased and the value of the shares has gone down or whatever. So those are kind of cases straight away you wonder what's the board thinking. But I think to your point, I already mentioned this independence on compensation committees to my mind is essential. You need compensation committees that are informed that have independent advice. They pay for independent advice so they're not necessarily just doing the line of the CEO. So who's on these boards? Corporate governance really needs to improve in this area. But I think you make a broader point about concentration of wealth and whether inequity is something that we can live with as socially as we go forward. I mean, clearly we're already seeing this huge populist uprising everywhere in the world. And my worry is that if we don't act proactively as companies, as business leaders, we will get regulation imposed on us which will lead to even worse and most disastrous consequences because regulation has never improved the quality of leadership in companies. So I think as business leaders, as academics or whatever, I mean this is clearly the direction that we need to push. Can you say something about boards briefly? Boards have, their lives have gotten a lot more complicated in the last several years. There's no doubt about it. Being a director is, you know, it's a very serious responsibility with more compliance responsibilities. I will say, I think we talk about board diversity in terms of gender and that's very important. I also think we need to talk about board diversity in terms of perspective because I think boards can be echo chambers because there's a lot of commonality in background. There are different skills and so on people are brought in for their depth of knowledge but we don't necessarily bring enough people into boards from outside so that there's breadth of knowledge in addition to, you know, depth in different ways and I think that would bring the voice of, you know, representing the societies that have to provide, you know, soft support, the social license to operate and I think that would improve some decision making as well on all things but particularly on compensation. But there are also, I think, two new sheriffs in town which are the institutional investors and the proxy advisors. So I think, you know, they're kind of raising the voice on that. BlackRock has just made an announcement that BlackRock has sent out a note to all its investing companies to say that if they're not reasonable on compensation they're going to have a say. Any other questions in the audience? Okay, I'm going to ask a provocative one. Let's take us four years down the line and let's talk about America. Will the ratios that I talked about be higher or lower or it's the same? Do I get more than 140 characters to answer? We'll take that as your answer. Yeah, well, that is part of the answer. I think we're in a volatile situation so I'm going to dodge it a little bit and say that America is in a volatile situation with the least predictable government we've had, you know, without being too grand about close to 100 years. And I think making predictions is really hard right now. I would think that by and large compensation will continue to go up, however. Rajeev, what are you seeing on the ground? I think I would agree with Aaron. I think it's going to depend a lot what happens to the stock markets because a large proportion of compensation going up or down is related to how the stock markets do. But what I worry about even more is that technology is going to create even more concentration. So there's going to be more consolidation, companies are going to become bigger and fewer companies are going to control more resources. Given all that and given we have two minutes left in this session, is there one thing that you can think of that will help ameliorate the perceived inequities in the executive compensation markets? Shall I go? I would love to see a coalition of CEOs call for more discretion and, frankly, slower growth of CEO compensation. I think there's strength in numbers. You talked about status. You talked about competition. There's strength in numbers. And I would love to see this be a dimension of CEO leadership. I think we have in fact here in Davos a compact for longer term thinking. Do you want to... To my mind, really, building on the same point, I'd love to see some role modeling. And I think that could have a huge impact in terms of how things move. Because if that doesn't happen, it's very unlikely that compensation will change. So we need some leaders coming together and really talking about the fact that there's a new social contract for leaders. And leadership is different. I mean, I think leadership in this new era is very different from leadership 10 years ago. And you need a license to operate. And that license to operate means you've got to be more inclusive. You've got to be more socially responsible. And you've got to be listening to your stakeholders. And if you're not, you're probably going to be a leader for even a shorter time, maybe making some more money and with the huge exit package, and with that thought, we shall end this session on ending executive pay. Thanks, everybody.