Saving Thousands and Wasting Billions: The Curse of the Middle Third

Mark Lonergan, January 20, 2012

Over the past 20 years in Silicon Valley, I have seen public companies go from CEO-run organizations with little compensation scrutiny to Board-led companies with hard-working compensation committees and associated compensation consultants. It is often the board now that determines the pay structures of the companies they serve, with a critical eye towards prevention of overpayment of key executives in the corporation.

Sometimes this approach works—usually it doesn’t.

In private discussions, comp committee members fret over the ‘visibility’ of their pay structures, anxious not to invoke criticism from ratings services and/or from investors. “Middle Third” becomes the compensation goal, ensuring that their scales will pass muster with activist groups critical of executive compensation. Senior team attrition is sometimes the result, followed by team demoralization. Examples in the technology markets are everywhere: Hewlett Packard, Cisco, Brocade, Blue Coat, Quantum and many more. The best leaders in organizations like these often end up being recruited away to places where boards are more willing to reward excellence and results.

I know, because I recruit these leaders into richer opportunities every day.

If your goal as a board is to create a company with “Middle Third” results and “Middle Third” teams, then by all means continue to use this approach. If not, then consider ways in which your best executives can reap benefits from the successes they consistently achieve.

Mark Lonergan is the Founder and Managing Partner of Lonergan Partners. He specializes in CEO and Board placements in technology companies.