You Get What You Pay For

Publisher’s Note: PEC Truthwatch welcomes thoughtful, informed guest submissions of varying points of view on almost any topic relevant to the members of PEC. With appreciation, member Dave Collins offered the following commentary:

by PEC Member Dave Collins

Johnson City

PEC Warren Buffet QuoteIt is an old saying (You Get What You Pay For) but remains every bit as true as ever. And it applies in a great many situations, including the executive pay at our PEC.

A week or so ago, Mr. Landaker wrote about the controversy once again stirred up by a quite small but very vocal group of members regarding the pay received by CEO Hewa and his executive staff. He bases his views, unlike any of those screaming “too high,” on many years of executive business experience. My comments are similarly based on my own executive management experience of over 20 years, much of that spent helping other executives improve their businesses.

Executive compensation in our country has become wildly out of alignment with the compensation of those who work for those companies. For both societal and business reasons, I think that extremely unwise.  But, it is the reality of the market for senior corporate leadership and the PEC has to compete for talent in the market like all businesses.

In my experience, it is a very poor practice to seek to attract and retain top-quality employees for any job based solely or primarily on compensation. On the other hand, absent the incentive of competitive pay in combination with other attractive job features a search for top-quality executives will prove unsuccessful. The PEC offers top executives in the non-profit or for-profit electric utility industry a range of features that are attractive to executives seeking a management challenge and excellent working conditions. That includes being in a highly desirable area of the country to live. So, not only does a business the size and complexity of the PEC need top-quality executives, with competitive pay we now have the right mix to be attractive to those executives.

However, there is a big problem when that compensation is not appropriately linked to clear, measurable goals and objectives that reflect a business’ business strategy. When I became involved in the effort to reform and improve the PEC I found no link between executive compensation and performance, not even poorly defined ones. It took several years to get those measures established and I am now – assuming no back-sliding by the newly composed Board – pretty comfortable with the ability to really pay for performance based on meaningful measures. While I still wish it possible not to be forced by the market to pay at these levels, based on the reality of the situation I see no prudent basis for arbitrary reductions based on ill-informed, ill-considered opinions. Quite the opposite.

pec you get what you pay forThe notion of substantial reductions in executive pay being proposed fits another old saying, “penny wise and pound foolish.” In advising my clients in efforts to reduce operational expenses, I worked to convey two concepts. First, be very wary of cutting those expenses that are tied to strategically important functions. As outlined above, executive leadership is clearly among those critical strategic expenditures, as it is for most corporations. Second, look to those expenses which account for a large portion of total controllable expense. Those salaries, particularly that of CEO Hewa, seem large to me and you as well, I expect. “Highly compensation” certainly applies. As noted, however, they are competitively required. However, all of the highest compensation packages combined is a very small percent of PEC’s total controllable expense. Barely a drop in the bucket. There are many other much higher expenses. To my delight as I have watched the PEC evolve from where it was to where it is today – as Mr. Landaker noted, now nationally recognized for the excellence of those improvements – I am proud of what has been accomplished. This is especially true of the dramatic reduction in expenses and the very great improvements in the quality of financial management and reporting. Any member who pays attention at all has seen the evidence of that in the multiple rate reductions since Mt. Hewa took the CEO position. Those were the areas I thought most critically in need of radical improvement the very first time I saw any financial summary in 2007.

As some readers may know, continued improvements in operating expense are at the top of the strategic agenda for both the Board and executive staff. Presumably that remains true of the Board as well who adopted that position a number of years ago. The guiding principle for those reductions has been and hopefully will remain achieving the lowest service delivery cost possible consistent with sound business practices while  the PEC’s high standard of service to members.

I sincerely hope that the most recent outbreak of the dangerous demand by a tiny fraction of active PEC members meets the same fate it has each time in the past – a timely and well-deserved death.

 

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