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Doubting Executive Pay
Directors and investors say exorbitant executive compensation causes resentment and harms corporate America's image, but the SEC's disclosure rules are not the answer. One expert says the problem stems from short-term thinking, rather than greed.
With the nation's attention focusing ever more intently on CEO salaries -- most recently in the form of congressional hearings before the House Committee on Oversight and Government Reform -- two different surveys suggest boards of directors and shareholders remain at odds over just how broken the system is and what they can and should be doing to fix it. In one study, by Heidrick & Struggles and the University of Southern California's Marshall School of Business, about one in three directors of U.S.-based public companies said CEO pay is "too high in most cases." The 2007 Corporate Board Survey of 210 respondents also found widespread unhappiness among directors over the latest disclosure rules about executive compensation mandated by the U.S. Securities and Exchange Commission. Most directors (about 90 percent) said they doubt the rules -- designed to give investors and corporate watchdogs better, timelier information about pay and other compensation for top executives -- are meeting investors' needs. "Executive compensation and how that information is disclosed have been controversial for some time," says Ed Lawler, distinguished professor of business at USC Marshall and founder and director of the university's Center for Effective Organizations. "But what this survey unmistakably shows is that the issues are a growing concern, even among the people most responsible for dealing with them: the board members of public companies," he says. Board members' dissatisfaction in the study centers on the type of information reported in the new SEC-mandated proxy statements. Only one in 10 said they believed the information did a good job of explaining how compensation decisions are made and fewer than three of 10 agreed the statements provide valuable information about the amount a CEO actually makes. "A major advantage [of the new rules] is to see the top five salaries, but even these are often obscured with descriptions of things [boards] can't fully understand," Lawler says. A problem contributing to hard-to-decipher information and continual salary increases, according to respondents, is the role compensation consulting firms play in the creation of new incentive-compensation programs. "It is interesting that even though it is boards that determine the level of executive compensation, they still point to the important role consulting firms play," says Ted Dysart, managing partner for the Americas with Heidrick & Struggles' global board of directors practice. In a separate study by Watson Wyatt Worldwide, corporate directors and institutional investors disagree over whether the U.S. executive-pay model is changing for the better, but both groups say the current model has hurt corporate America's image. The study, 2008 Report on Directors' and Investors' Views on Executive Pay and Corporate Governance, which surveyed 163 directors and 72 investment and pension-fund managers, found 63 percent of directors think the pay system is improving, compared to just 36 percent of investors. It also found 65 percent of directors believe the current pay model has helped to improve company performance while only 39 percent of investors feel that way. "While directors believe the system generally works, institutional investors ... feel the model's flaws run deeper and require more substantial changes," says Ira Kay, global director of compensation consulting at Washington-based Watson Wyatt. "Clearly, more work needs to be done." Most of the respondents (75 percent), however, believe the model has tarnished the nation's image, has led to resentment among the rank-and-file and has resulted in excessive executive pay. Though the numbers are strikingly different in the two studies, says Lawler, both seem to indicate that "making CEO pay public won't slow down" the increasing momentum and rate of CEO payouts. "Maybe a political change in Washington could slow things down ... but I wouldn't see that happening right away" even in the event of a Democratic victory, Lawler says. The mounting conflicts among board members, shareholders and company leaders over incentive compensation all boil down to short-term thinking, says Frank Placenti, corporate governance expert and partner in the Phoenix office of Squire, Sanders & Dempsey. "Investors are clamoring for a more direct linkage between executive pay and performance while, at the same time, pushing for increasingly earlier ousters of management at companies that stumble, even temporarily," Placenti says. "The resulting environment is one of high risk and high reward, where senior executives ultimately command higher salaries because the penalties for failure can be draconian. "The irony," he says, "is that both sides too often place an unhealthy emphasis on the short term, with investors asking, 'What have you done for me lately?' and executives thinking, 'Pay me today because I might not be here tomorrow.' The enemy here is not corporate greed. It is short-term thinking."
April 3, 2008 Copyright 2008© LRP Publications |
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