The actual results were nowhere to be found.

An email was sent to PRSA asking where the actual results were. PRSA originally refused to release the results, citing competitive reasons, even though its 2008 survey results had been available online. A day later, however, PRSA posted the 2011 results on its PRSAY blog.

The results, as presented, contradicted Fiske’s otherwise glowing review what members appeared to be thinking.

Only 56 percent of the survey respondents indicate “satisfaction with membership.” To those of us who attempt to practice ethical PR, an obvious emphasis should be on improving upon whatever is leading to 44 percent of members being less than satisfied.

Instead, potentially negative information wasn’t mentioned either in the results or in Fiske’s blog post. More to the point, a basic calculation about the number of PRSA members who responded to the survey shows that very little should have been inferred from the survey in the first place.

The reason why has to do with basic survey methodology.

PRSA’s survey error

PRSA wrote that “Ketchum worked with Braun Research to complete online interviews with: 1,126 current members, 202 lapsed members, and 584 never members.” It is unclear how these members were chosen and how well they represent the total membership, two points which PRSA recommends doing as best practices when reporting survey results. How members were chosen and how many responded are critical issues in determining the validity of the responses, as well as the accuracy of claims by PRSA leaders about the survey results.

Presumably, however, these interviews were the online surveys solicited to all members in June. PRSA says there are more than 21,000 members. If all members were surveyed, that means the response rate was about 5 percent*. More below…

From PRSA’s Code of Ethics

DISCLOSURE OF INFORMATION

Core Principle Open communication fosters informed decision making in a democratic society.

Intent:

To build trust with the public by revealing all information needed for responsible decision making.

Guidelines:

A member shall:

• Be honest and accurate in all communications.
• Act promptly to correct erroneous communications for which the member is responsible.
• Investigate the truthfulness and accuracy of information released on behalf of those represented.
• Reveal the sponsors for causes and interests represented.
• Disclose financial interest (such as stock ownership) in a client’s organization.
• Avoid deceptive practices.

It is likely PRSA experienced a sampling error with its recent member survey.  The problem is that an adequate response rate is subject to debate. (In my graduate survey research course, we were told we needed at least a 70-percent response rate in order to draw a reliable inference from survey results.) Nevertheless, this source discusses how to handle a low response rate.

A presumed 5-percent response rate* should be considered low; therefore, any inferences drawn from this survey should be made with a caveat that a low-response rate means it is difficult to generalize the results across the entire PRSA membership.

That’s not what PRSA did.

PRSA’s claims

PRSA choose instead to boast the following:

“…Our research shows that PRSA members not only value the National organization and their local Chapters almost equally, but also appreciate the National organization just a tiny bit more.” – William Murray, PRSA president and COO

“(Members) are … incredibly satisfied with the value of their PRSA membership.” – Rosanna Fiske, PRSA chair and CEO

PRSA’s response

When criticized for spinning the survey results, PRSA went on the offensive. Arthur Yann, APR, vice president of communications, accused this author of smearing the society and criticized the approval of a post comment by longtime PRSA critic Jack O’Dwyer, by saying that “you continue to entertain offensive, discriminatory, possibly libelous and certainly non-germane comments on your blog posts.”

Yann also accused this blog of providing a “selective interpretation” of the data even though the original post ended with this statement: “It is important to note that because of how the results are presented, more than one interpretation can be made…. I post my analysis to provide a perspective I believe is lacking in PRSA’s versions of the results.”

Fiske responded most reasonably, saying, “Any research needs greater context in order to synthesize the data. Providing our different perspectives here is part of that process.”

Indeed.

What is troubling is PRSA’s adherence to a perspective that seeks only to bolster the image of PRSA.  At a time – it’s ethics month – when the society is pushing for ethical practice, and rightfully calling to the carpet other organizations that suffer from ethical lapses – including the PR firm, Ketchum, that was contracted to do the PRSA survey – PRSA makes great effort to diminish, ignore and divert attention away from its own transgressions.

To call this disingenuous is to be charitable.

* PRSA said it would make other results available by request: “PRSA members may request access to specific data from the survey by sending an email prsay@prsa.org.” An email sent a week ago to three of PRSA’s communications personnel requesting the actual survey response rate, among other questions. The information has yet to be provided. This post will be updated if it is.

Click image to see actual member satisfaction with PRSA.

It took a bit of haggling, but PRSA posted this week its member-satisfaction survey results for 2011. After PRSA CEO and Chair Rosanna Fiske, APR blogged about the results, an obvious question was raised by myself and Alice Irvan, APR, PRC: Where are the actual results?

We wanted to see for ourselves what the member survey results were, not PRSA’s interpretation of them. By posting about the survey results and not THE survey results, a major strategic error was in the making, one that would likely incite its regular critic(s).

While PRSA has been cagey about certain issues affecting the society, it was relatively quick to respond transparently in this case. Particularly helpful was Arthur Yann, APR, vice president of public relations for PRSA. This is important because, ironically, one of the “top learnings” presented on slide 4 of the results  PRSA posted says, “PRSA needs to continue to focus on access to information….”

I would modify this to read: “PRSA needs to continue to improve access to information….” When PRSA decided to post the survey results in a slideshow format, the take-home messages were already written into the presentation.

One needs to look closely at what the data show, however. My particular interest was chapter versus national preferences. Since chapters will soon be voting on a potential dues increase from the national level, and I know for a fact many, if not most, of my local peers find more value in local offerings than what comes out of national, it is important to know whether this is a consistent trend across the Society.

It is. Read more below.

Data indicate PRSA members have the strongest interest in local chapters, followed next by interest in national. Interest in district-level activities is relatively low. For example, slide 6 shows understanding of local chapters ranks at 80%, versus 65% for the national level. How well do members understand what districts do? Only 26%.*

This is important for discussions about dues increases. It is clear that location plays a strong role in member and non-member knowledge of PRSA.

Moreover, satisfaction with membership (slide 7) is ranked at 56% for PRSA members while lapsed members rank satisfaction at only 39%. Slide 16 breaks down these data even further. Anywhere from 40 to 62 percent of members are satisfied with membership, depending on where they are time-wise in their careers.

But those willing to recommend a local chapter? The percentage range goes up: the lowest percentage is 47% while the highest is 70%. .

Fiske writes: “PRSA members are also incredibly satisfied with the value of their PRSA membership.” Not true. The results show there is a noted difference in attitude between local and national PRSA offerings. Member satisfaction (slide 7) in general is 56% for members. Calling this “incredibly satisfied” is disingenuous.

It is also, to me, somewhat startling. I want to know why. The text above the chart on slide 7 only indicates that, “despite low incidence of satisfaction, nearly one-fifth of lapsed members are likely to renew their membership.”

Another selective interpretation. This also means that four-fifths are not likely to renew their membership. Again: Why?

More to the point, the way these results are crafted and presented is not exactly academic in nature, but rather self-affirming. The summaries of the survey results as presented show feedback on what PRSA already does, not what it could be doing. In short, the results appear to have the aim of maintaining the status quo of PRSA national.

A more important question looms:  In the face of a relatively large dues increase from the national level, why should members pay more to PRSA national when local offerings appear more relevant to their careers?

*It is important to note that because of how the results are presented, more than one interpretation can be made. (Information is missing from the slideshow. PRSA said it only posted the top findings for competitive reasons.) I post my analysis to provide a perspective I believe is lacking in PRSA’s versions of the results. What do you think? Please comment below or on my Facebook page.

There’s an assumption with social media

Social media have in fact been ample ground for more spam, something predicted years ago since the newer technologies are extensions of web-based technologies from the late ‘90s that gave rise to porn being the most popular market on the Internet. Social media are another layer of opportunity for spam, porn and attack merchants.

One firm local to Reno, for example, mandates that its personnel post certain numbers of tweets for clients. The rationale here isn’t to be transparent, it is to attempt to create buzz in order to hopefully impact sales. Such an approach will likely fail even though it keeps the firm solvent and, perhaps, prosperous.

Transparency, in contrast, is a philosophical stance. Even journalists or news media organizations that like to brag about holding public officials to account are the among the least comfortable with transparency, something that has enabled a growing niche of media communicating direct to consumers, as the site ThisIsReno.com does.

A recent article at the Washington Post’s D.C. Sports Blog outlines this new dynamic:

“I think it’s something that you need to internalize: that we’re our own media company,” (Ted) Leonsis said … addressing The Post. “I announce things on my blog. I get 40 to 90,000 people coming to my blog, depending on the subject. I have a direct, unfiltered way to reach our audience now, and I think that harnessing that is what you have to do as ownership, because we are media brands. We’re in the subscription business. We call them season-ticket holders. We’re in the sponsorship business. We’re in the same business [as The Post]. When someone goes to find out something about me or a team or a player, and they go to Google and they type that in, I want to learn how to get the highest on the list, and I’ve done that. I don’t want The Washington Post to get the most clicks. I want the most clicks.”

It also works out that these media have turned the tables on traditional news outlets. The local daily newspaper’s publisher recently got arrested for a DUI. Only after it was noted on Twitter that a mugshot did not accompany the brief and buried article on the arrest did the paper post the photograph. This is despite the site’s aggressively marketed mugshot gallery, which to date does not feature the paper’s publisher; although, this could change since the paper has been known to alter content on its site after being outed for withholding key information in its reporting.

Even though the mugshot was eventually posted, it was obvious that the paper’s anonymous commenting system was also closed on the DUI story, and in a brief and buried follow-up. This was in stark contrast to the paper’s commenting system that is otherwise open to all levels of anonymous attacks on anyone who happens to be mentioned in a news story.

Fortunately some news media personnel do not adopt the same double standards Gannett advances.  When the local weekly’s editor got arrested for a DUI, it was a front-and-center story, a rare moment of journalistic excellence in the Reno market.

The difference is that one news outlet owned its story; the other tried to diminish its imperfection.

It goes to show that standards of transparency and openness are subject to interpretation, irrespective of social media. The climate today, however, forces transparency. The New York Times’ DealBook blog quotes Michael Fertik, CEO of Reputation.com:

“Everybody likes to believe in transparency, until it affects their personal lives. We’re reaching a tipping point, where radical transparency is getting close to radical invasion.”

A popular, formerly local blogger — ironically, a representative of the spam firm noted above — developed an online reputation for years, all under a pseudonym. Indeed, her blog was interesting, frequently relevant and she addressed issues about Reno that needed public airtime.

The minute her identity was public, her postings dropped notably and the edge anonymity previously afford her disappeared. She subsequently went on to publicly advocate for using social media to increase transparency — in government. (Presumably, individuals such as herself and firms like her employer were exempt from new standards of openness.)

By law, though, government is transparent. Salaries and salary schedules are posted online. Many, if not most, documents relevant to government business are public and available by request, social media notwithstanding.

What social media do is enable transparency. Without an incentive to be open in the first place, social media are but additional communication vehicles. That’s why so many, including the self-anointed champions of transparency, frequently clamor to the clouds while more genuine efforts at transparency may or may not ever get noticed. If information is public in the first place, newsworthiness is diminished.

An organization does not have to be transparent because of social media. It will, though, potentially feel the sting of what others say in social networks should they choose to hide something of interest from the sunlight — regardless of who they are and what they represent.

[Edited 2/2/11 for minor grammatical changes.]

"In January 1969, as the Nixon administration took office, oil leaking from a well on a Federal Outer Continental Shelf lease in the Santa Barbara Channel off California blackened nearby beaches and threatened marine life. Studies by a task force including Survey geologists and engineers led to new and more stringent operating regulations to prevent or control such incidents in the future. The Santa Barbara oil spill was a catalyst in the passage of the National Environmental Protection Act in January 1970." -- USGS (http://pubs.usgs.gov/circ/c1050/age.htm)

At the risk of creating confusion — as I did with the Brand Crisis post, in which my more steadfast critics seemed to confuse observation about crisis response rules with prescriptions for how to respond — times necessitate discussion about brand crises being played out in the media. Most notable of course is the environmental catastrophe in the Gulf.

By most indications, BP is taking complete responsibility, so it is prejudicial to fault, at this point, the handling of the crisis by BP, despite some misstatements by its CEO and other personnel. What we should be concerned about, though, is what led to the devastation we’re seeing.

Like many crises, this one was unforeseen despite warning signs that such an event could occur. We saw this with 9/11, Hurricane Katrina, the housing bust of 2007 and the severe economic recession of recent years. Hints that something was to come, or something major could happen, were not sufficiently acted upon until it was too late. What actions occurred seemed inadequate in comparison with the consequences of the crises.

Public response to the BP oil spill is somewhat predictable. Understandable outrage and sadness have ignited passion to the point that reason is being thrown out the window in many instances. If, say, a dramatic boycott of BP were to occur, it would only negatively impact the company’s ability to mitigate the natural resource damage. Already officials are on record saying that BP’s resources are necessary to work to solve the problem; BP, to its credit, has said it will clean up every last drop of oil.

But the situation should have never occurred in the first place. And the reason why it did should cause certain unease among the rational-minded. If we honestly assess what led to the oil spill, we must consider global and historical contexts. After-action reports about this crisis will most certainly fault BP, government agencies and other powers that be for allowing such a technology to be created that had no readily functioning off switch.

But societal pressures, which support corporate productivity and expansion, contribute to these human-influenced disasters. Anthropologists have long cited the size of human systems — the main ones being based around bands and tribes, numbering about 40 to 150 people, for the bulk of human existence — as determinants for societal functioning. The larger the human culture, the more complex it is, which enhances the potential for more devastating problems. Human civilization, what we perceive as a normal fact of life, is an aberrant human system, one with roots only about 10,000 years old as opposed to about a 400 to 250 thousand years of human history.

Spurned by the gradual but widespread conversion of human cultures from tribal organizations to agriculturally based societies has led to remarkable technological advancement, increased food production, fast population growth, the industrial age and, now, technological revolutions.

What’s both fascinating and scary is that human systems are now so large and complex that they are beyond the control of the individual. We can not wish-away the BP crisis, nor can we honestly lay sole blame on the company or federal regulators.

What led to this situation was a rapid evolution of the human condition in relatively recent modern times. Collectively we have consented to our cultural growth beyond the point of easy remedy when problems arise because of the need for that growth, and each of us is a contributor to this process, as each of us is a member of this global, experimental culture — even the most adamant of protesters and critics.

While I do not have a simple remedy, honestly acknowledging how we came to be in the position is perhaps a first step when looking at massive crises. Until then, critiques and suggested solutions will forever be cast in the here-and-now, ignoring the ultimate forces of change that led to the disasters in the first place.

—
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I’ve been thinking recently about the generational gap, real or perceived, in social media use. I’m not sure it’s generational. I think it’s more accurate to say that being savvy with social media falls better into paradigm of literacy, such as public relations literacy, computer literacy and now, social media literacy. Age isn’t the gap-maker, but interest, time and personality perhaps are what separates those fluent in social use and the willingness to learn from those who are not.

I’ve written many times before about how social media breaks down barriers between us and our publics, which means we have to be better, more open and more genuine communicators, and by this I mean we have to be more transparent, which ironically seems to be a challenge and a risk for many PR pros. It also reduces the power of the news media –something PR pros also seem uncomfortable with at times — which public relations has relied on for far too long to communicate its messages.

With this in mind, I’ve created a bit of a comparison for how public relations professionals manage reputations within the paradigm of being social media savvy. I’ve chosen the terms “old” and “new” not to signify age but the changing mindset of how things used to be done versus what’s occurring with social media.

These ideas are just a starting point. I welcome your thoughts and contributions in the comments.

Old Minds: Rely on third-parties to communicate
New Minds: Establish new channels of communicating directly with constituents

Old Minds: Rely on traditional channels for message delivery
New Minds: Offer multiple channels for conversations

Old Minds: Try to control conversations
New Minds: Participate in conversations and/or take the lead in starting them

Old Minds: Go to the very parties who muddle messages for redress
New Minds: Go directly to important audiences to set the record straight

Old Minds: Seek dialog offline
New Minds: Take risks with online, public dialog

Old Minds: Demand organizational transparency
New Minds: Demand holistic transparency — for both organizations and publics

Your thoughts?

I don’t know Sarah Soczka, but if I ever meet her, I’m going to buy her a beer. Sarah is the unwitting victim of the “watch what you say online” crowd, specifically one Jeff Bentoff, APR, of Bentoff, LLC from Wisconsin. Bentoff writes in the June issue of the Public Relations Society of America’s TACTICS newsletter about “A cautionary Twitter tale: Young professional learns a tweet lesson.”

Bentoff details the story of how Soczka wrote a brief and, in my opinion, relatively milquetoast blog post on her own blog, and presumably on her own time, about why Newshub (Milwaukee Journal Sentinel) is better than BizJournalMke (Milwaukee Business Journal). She was clear to say the post and her blog and Twitter account represent her own views.

Nevertheless, Bentoff writes:

“Her blog posting might have gone unnoticed, but bringing attention to it via Twitter was like throwing birdseed into a bird’s nest.

“Only 10 minutes after Soczka posted to her Twitter account, the Journal Sentinel’s main Twitter writer retweeted the item and headline to its many followers.”

Bentoff admits that Soczka was correct in her post, and he makes efforts to praise her as “a social media natural” … “who is fluent and comfortable with the tools.” His tone ends up as chastising, however, and what he does to Soczka next is a classic case of shooting the messenger.

He recounts:

“The twittering crescendo quickly reached the ears of Mark Kass, the Milwaukee Business Journal’s editor. Kass said that his first reaction was, ‘Who is she, and why did she do this?’ He added that he agreed with the points that she made on her blog, but was disappointed that she hadn’t contacted him before posting. Kass said that had she done so, he would have explained that his paper had started tweeting two weeks before and had already made plans for reporter tweets in the style Soczka advocated for.”

Kass’ initial, ad hominem reaction of “Who is she?” is alarming coming from someone in the news business. The news media regularly defends itself as reporters of information against those who blame journalists for the impact of putting out the news and commentary. That’s what basically what Soczka was doing: commenting on the use of social media by newbs, ineffective use of social media being so omnipresent that it’s a wonder Soczka wasn’t harsher. For Kass’ first response to be of the shoot-the-messenger variety puts his own credibility in question.

Next, there is no reason whatsoever that Soczka should have contacted the Milwaukee Business Journal prior to posting. Commentary legitimately does not require letting parties have a “fair” say prior to publication. The news media certainly wouldn’t do this; why should a blogger? Kass’ response is more about his own ego than about anything Soczka wrote.

What happens next is even more telling. Back to Bentoff:

“Kass said that he didn’t think Soczka was fair with her comments in comparing a new Twitter feed with a mature one. After hearing about the tweets, Kass also contacted Soczka’s supervisor and the three of them met so that he could explain the Business Journal’s plans to her.”

Let’s get this straight. Kass expects to be notified before anyone writes something potentially negative about his use of Twitter but then goes to the messenger’s supervisor, who has nothing to do with this issue, so he can “explain” his social media plan?

There is only one reason that Kass approached Soczka’s supervisor and that was to put her on notice. It was a veiled threat and a way for him to put the practitioner in her proper place with a subtext that says, “How dare you criticize me.”

Put another way: Reporters frequently don’t extend polite courtesies to PR people (I have vivid memories of being verbally bullied by a belligerent, screaming reporter leveling all sorts of his personal allegations at me on one occasion, along with a number of other examples), and its erroneous to assume that kissing reporters’ asses will get you very far. Prompt, polite responses, useful information, access to the right sources, yes. Gratuitous niceties, no.

Lest we forget: Journalists in general consider PR people a necessary evil. Anyone who has been in the business awhile, especially in public sector communications, knows it’s not uncommon for an “official” perspective to be looked upon with far more scrutiny than, say, that of an accuser, protester or any other kind of agitator. This all in fairness, of course.

This situation raises another critical point that gets little attention; the change in culture as a consequence of social media. Social media reduces the need for a middleman and conversations are open to the world. While this means caution should be exercised, it also means there is an emerging acceptance and acknowledgement of online behavior previously viewed as taboo, behaviors that arise because of the nature of who we are as humans and because this is how we now communicate.

In addition, the public relations profession mandates the free flow of information. Nowhere to date but in social media can this happen so effectively. The free flow of information also means not all information is first created equal and, second, will be interpreted the same way among publics. Because of this, along with the reality that PR people are blogging all over the place, we finally get to voice our concerns, perspectives and opinions. This is something to be celebrated, especially in an industry that prior to new media had far less of a voice. Bloggers are supposed to be provocative; PR people should weigh in on the effective use of media, even if they are critical. We’ve tolerated enough of the cheeky, third-grade level pedantic commentary from our local media sources. It’s time we had our say.

On the flipside, there’s plenty of room for outlining consequences and, most importantly, developing skills for handling inevitable crises and controversies. The problem isn’t that controversies arise; the problem is how they are frequently mishandled. Sure, PR people should be vigilant about what they say online and elsewhere, but it’s a basic error to attempt to enforce a bogus professional morality in professions – news reporting, PR – that inherently don’t play by the same rules and do not extend mutually equitable courtesies.

Sarah Soczka: You deserve a raise. The main thing you need to be vigilant about is which of the anachronistic views that come your way are actually worth a listen. Keep blazing trails, my friend.

POSTSCRIPT

Just before hitting publish, I went to the Milwaukee Business Journal’s Twitter account. True to Soczka’s original criticism posted in February, the Business Journal’s Twitter follows nobody and merely posts news back to its own site. It has 671 followers. If Kass agreed with Soczka’s point, as he claimed, it might behoove him to do something about it, like he said he was going to. I’m now even more baffled as to why Bentoff wrote this “cautionary tale” in the first place when Kass and the Business Journal, especially in contrast with the Milwaukee Journal Sentinel’s Twitter, are enacting what we involved with social media refer to as an “epic fail.”

[EDIT 1:41 p.m.: I was just informed that the Business Journal has a number of reporters who Twitter, including the editor, Mark Kass. Please consider this in the context of the above statement. I apologize for jumping the gun about the Journal's social media use without checking it out first. -Bob.]

This Bike is a Pipe Bomb photo by Jeff Moser / Bike Carson on Flickr

Public relations’ Code of Ethics serves as a viable reminder for being honest not just in your professional life, but for life in general. Honesty, the free flow of information and accuracy serve as valuable credos for personal and businesses relationships.

Nothing exemplifies this more than the ongoing hubbub about appropriating content from other sources. Taking content from someone else for your blog, or other use, and not crediting the original source is a clear violation of PRSA’s Code of Ethics, yet far too many people do it.

Me included. Looking back on past posts, I have strived to cite sources as much as possible, but when it comes to mainstream news outlets, I have played loose with the ethics, mainly in using photos from the Associated Press or other global news outlets for my own posts.

While it can be argued that such use falls under the Fair Use doctrine – which is a considerable point, as Rogers Cadenhead knows too well from his noted controversy with the Associated Press – using such content without crediting the original source is clearly wrong.

I’ve fucked up. More than once. I know better too but I’ve been careless. From here on out, if I cannot find a suitable image to use for my posts, I will credit the original source if I use an image from elsewhere. If a concern is raised about even using the image, I will remove it. (Most, I’ve learned, are more than happy to see their content referenced, cited and even republished, which is a part of what being networked is all about.)

Another element to misappropriating content is taking it, using it without attribution and then claiming it as your own. This is what FOX News has done to Carson City, Nevada blogger Jeff Moser, which he just discovered.

Jeff writes about the bike culture in Nevada’s capital, Carson City. Jeff is a long time friend and he, to me, exemplifies citizen journalism or niche blogging. More importantly, he uses his blog not only to convey relevant and up-to-date information, but to connect with real people in real life and, in general, to improve the quality of life in Carson City.

One day Jeff noticed a bike parked at a coffee shop with a sticker that read, “this bike is a pipe bomb.” The sticker is actually the name of a punk band that apparently is put on bikes all over. Jeff took a picture of the bike and posted it on Flickr where it’s licensed under Creative Commons, which means anyone can use it but they must give credit to the original source.

Months later Jeff did a search for the image, and what he discovered resulted in a new blog post: FOX News used the image for a news story without given credit to Jeff. It also later claimed the image as its own by watermarking the image with its own logo.

While bloggers must keep out own ethics and houses in order, so too must the news media.

I am not hopeful for any kind of public outcome for Jeff, other than some snarky comments on his blog and a little bit of online hype. The reason is this: While PR folks – and really, people in general — should be prepared apologize, or acknowledge wrongdoing, the news media business must also do the same. The problem is that too often, it doesn’t.

The same day Jeff posted his “No Spin Zone” story, a local columnist posted this, where he details news business advice he once received: “Never explain, never apologize.” (The columnist, to his credit, selectively ignores the advice.)

Let us hope that as news businesses are forced into radically transforming their operations, part of what is left behind is the “never explain, never apologize” attitude.

[NOTE: I emailed the myFOX Mephis reporter who originally reported the story using Jeff's image and requested comments and aswers to questions. I will update this post with her reply should it be received.]

Read Part I and Part II.

Important facts about CEO salaries tend to be ignored by the news media. The back-story, the realities of CEO compensation, are far more complex than what can fit into a 30-second series of sound-bites on the evening news, and the complexities are often overlooked in even the more in-depth written stories.

Yet these points are a key to understanding why it is that CEOs make the money they do. Nobody understands this perhaps better than Thomas Sowell, who has taught economics at institutions such as Cornell, UCLA and Amherst. He is currently a scholar-in-residence at the Hoover Institution, Stanford University.

Sowell provides provides a thoughtful context for CEO salaries.

“Among the bountiful supply of fallacies about income and wealth are the following:

1. Except for the rich, the incomes of Americans have stagnated for years.
2. The American middle class is growing smaller.
3. Over the years, the poor have been getting poorer.
4. Corporate executives are overpaid, at the expense of both stockholders and consumers (pg. 124).”

“The high pay of corporate executives in general, and of chief executive officers in particular, has attracted much popular, media, and political attention – much more so than the similar or higher pay of professional athletes, movie stars, media celebrities, and others in very high income brackets. While the top ten corporate executives earned an average of $59 million each in 2004, the top 10 celebrities earned an average of $119 million each that same year – twice as much. Yet it is rare – almost unheard of – to hear criticisms of the incomes of sports, movie, or media stars, much less hear heated denunciations of them for ‘greed.’*

“One of the most popular – and most fallacious – explanations of the very high salaries of corporate executives is ‘greed.’ But when your salary depends on what other people are willing to pay you, you can be the greediest person on earth and that will not raise your pay by a dime” (pg. 141).

So why is it that corporate CEOs make so much money? Sowell says that the simple answer is the basic principle of supply and demand. Further, there’s a sound economic reason for high CEO compensation packages, namely the impact CEOs have on high-stakes corporate decisions.

“Given the billions of dollars at stake in corporate decisions, $59 million a year can be a bargain for someone who can reduce mistakes by 10 percent and thereby save the corporation $100 million…. For example, the director of the company that publishes the Washington Post assessed the recommendations of one member of his board of directors this way: ‘Mr. Buffet’s recommendations to management have been worth – no question – billions’” (pp. 142-143).

It should now be obvious why corporate leaders receive what are dubbed golden parachutes upon termination. Simply, if CEO decision making is faulty and is in fact costing the company money, a “lucrative” severance package may in fact be a cost-saving investment for the company. Again, Sowell explains:

“…Putting an end to a relationship may be just as valuable, or even more valuable, than the initial beginning of the relationship once seemed. As with the original hiring decision, neither stockholders nor consumers nor other employees are worse off for the payment of a large severance package, if that cuts losses that would have been bigger if the failed CEO stayed on” (pp. 144-155).

At the least, the next time a story airs that mentions leadership salaries in contexts deemed negative, it is likely that only a sliver of the picture is being revealed. To adequately understand the myths and realities of CEO compensation requires truer objectivity and a more thorough understanding of corporate trends beyond what headlines and charged storylines procure.

 —————————————–

*Activist filmmaker Michael Moore, who frequently attacks corporations in his films, said on Larry King Live in November:

“… [W]e’ve allowed a few people at the top to get filthy rich…. The Ford chairman is making something like $22 million a year and his company lost $2 billion last year. The G.M. chairman is making $15 million a year. His company lost $39 billion last year. And he’s rewarded with a $15 million payout. I mean this is — this is just absolutely insane….”

Moore himself is said to be worth more than $50 million.

Read Part I here.

The reason for such outcry about CEO behavior is not because what CEOs do is arrogant – it just appears that way. It is not because their salaries are out of line – if that were the case, celebrities’ salaries, which are higher on average than CEO salaries, should also lead to outcry. The reason for the hysteria is more because of public ignorance and allegations made by the news media starting about 20 years ago.

“Although the business press had followed CEO pay for decades, CEO pay did not really become a public ‘issue’ until 1991. Feature stories on CEO pay aired on the nightly news broadcasts of the three major networks in the Spring of 1991, and CNN, 60 minutes and Nightline devoted segments to CEO pay. The controversy heightened with the November 1991 introduction of Graef Crystal’s (1991) expose on CEO pay, In Search of Excess, and exploded following President George Bush’s ill-timed pilgrimage to Japan in January 1992, accompanied by an entourage of highly paid U.S. executives…. By the mid-1990s, media and political attention focused on the growing disparity between CEO pay and average worker pay, and on escalating CEO pay in downsizing companies. Newsweek ran a February 1996 cover story on ‘Corporate Killers: The Hitmen,’ which identified CEOs both by their salaries and by how many employees had been fired in recent restructurings…” (source, pp. 50-51).

The problem with such news media created invective is that most people do not understand how businesses operate and why CEOs make the money that they do. Most people, who in America earn a middle-class income, simply cannot fathom the amount of money some of these CEOs take home, not to mention the perceived lucrative packages received when CEOs are fired.

Because we are used to our own meager salaries, and typically, living paycheck-to-paycheck, the world of multi-million dollar salaries appears foreign. It is therefore easy to generate assumptions about such salaries.

CEO compensation has been climbing steadily in the past two decades, and the perception that goes along with astronomical compensation packages is often negative. Kevin Murphy of the Marshall School of Business at the University of Southern California, wrote a paper in 1999 that outlined emerging trends in CEO compensation, as well as the “populist attack on wealth that followed the so-called ‘excesses of the 1980s” (pg. 1). Murphy provides a background on the reality of CEO salaries, and it is important to understand the four key components of executive pay packages:

1. Base salary
2. Annual bonuses tied to accounting performance
3. Stock options, and
4. Long-term incentive plans (pg. 3)

So Alan Mulally of Ford and other CEOs may forego their salaries as a symbolic public relations gesture – and to appease grandstanding politicians – but they’re still getting along just fine. And the public and news media remain uninformed of just how complex the issue of CEO compensation really is, while compelling headlines about alleged corporate malfeasance continue to be written.

Read Part III, the conclusion, tomorrow.

There’s nothing quite like a news story in which a corporate CEO is photographed in handcuffs. As the perceived pinnacle of global malfeasance, today’s CEO is widely vilified, and often for good reason. Or so it is assumed.

Nothing illustrated the wide disconnect between CEOs and the masses than Alan Mulally’s testimony in front of Congress where, after flying to the hearings in a corporate jet about the desperate situations Ford Motor Co. and other major car manufactures are in, he was asked to relinquish his salary. His reply:

“I think I’m OK where I am.”

Where he was, was at about $13.6 million, which was a 37% pay cut from 2007, when he earned about $21.7 million.

His response ended as public relations disaster that resulted in Ford Motor Co. and crew later driving to Washington in hybrid vehicles and Mulally eventually agreeing to a $1 a year salary.

Such actions, though, are window dressing and serve only public relations and political purposes, not actual corporate or operational improvement. Mulally’s salary is a mere drop in the bucket for what is needed in order for Ford to survive the economic crisis, and his later trip to Washington in a hybrid was nonsensical from a resource and policy perspective.

From a public relations standpoint, it was a no-win situation for Mulally. Jason Vines, a former Chrysler spokesperson, said: “If you do what people think is the right thing, then they’re just going to be reminded that you came in corporate jets before.”

The problem is that from an efficiency standpoint, Mulally should have been in a jet from the get-go, and he should have remained so. As someone whose time is more valuable that most of us can fathom, sitting in a cramped car for a nine-hour trip to Washington is more wasteful of Ford’s resources than flying.

The PR backpedaling may have helped to kill the story line, and the public perception was perhaps mildly satiated by this maneuver – meaning, Ford’s approach was most probably the right thing to do from a PR standpoint – but it’s a structurally unsound way to conduct business and in fact may violate company policy.

“According to Ford’s proxy, Mr. Mulally was required to use Ford aircraft for all business and personal air travel in 2007 for security reasons and his family and guests were allowed to accompany him.

“The arrangement also covers travel by Mr. Mulally’s wife, children and guests on company aircraft for personal reasons without him at company expense upon his request to ‘ease the burden’ of moving to Michigan and away from family in Seattle, according to the proxy.

“Ford’s proxy said the only other person allowed to use corporate aircraft for personal reasons is Executive Chairman Bill Ford Jr” (source).

In other words, Mulally got in trouble for following the rules.

Read Part II tomorrow.