Drucker once described the role of CEO as an impossible job. Let’s begin with some of Drucker’s earlier comments on executive compensation and then explore what is happening in CEO compensation today.
Drucker expanded on his above quote in The Practice (1954) in his discussion of compensation as a reward and incentive and that they should be directly tied to the achievement of objectives. He also felt that compensation systems should not be so rigid as to exclude special rewards for “performance over and above the call of duty.”
Here he added that “the reward for such contributions should be rare, like the Congressional Medal of Honor or the Victoria Cross. But it should also be as conspicuous and as great.”
Drucker built on this concept of rewards for performance in Managing for Results (1964) by stating, “If a company is to obtain the needed contributions, it must reward those who make them. The spirit of a company is made, in the last analysis, by the people it chooses for senior positions.” He did not go on to expand on his views on executive compensation in Managing for Results and avoided the topic all together in The Effective Executive in both his earlier 1967 and updated 2006 version.
A Dangerous Illusion
Drucker dealt with the topic of executive compensation in more detail in Management (1973) in his discussion of Executive Compensation and Economic Inequality. He went to considerable length in his discussion to cite that the inequality of incomes between the person on the “top” and the blue collar in the factory was much lower than what Americans actually perceived.
Here he commented that numerous surveys suggested that an “income ratio of 1 to 10 or 12 (“big boss” to the factory worker) would be considered “about right.” In fact, he stated that “relative to the incomes of manual and clerical workers, after tax executive compensation, and especially the income of men at the very top, has been going down steadily for fifty years or more.”
He then added, “The facts of increasing income equality in U.S. society are quite clear. Yet the popular impression is one of rapidly increasing inequity. This is illusion; but it is a dangerous illusion.” He attributed this illusion to “the widely publicized enormous pre-tax incomes of a few men at the top of a few giant corporations, and the – equally widely publicized – “extras” of executive compensation, e.g. stock options.”
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