The Advisors' Blog

– Broc Romanek, CompensationStandards.com

One of the more disappointing aspects of this market meltdown has been the lack of leadership from the top of Corporate America. So few CEOs have spoken publicly about what can – and should be – done to fix what ails us. There has been panic in the air for over six months, and this may well accelerate if some of our biggest banks are nationalized. Where is the leadership? Hence, the “Slap a CEO” game.

Even more perplexing to me is that a few lawyers are finally speaking up about executive pay – but they are speaking up to defend past practices and urge that they be continued (in comparison, many tell me privately that they agree with our mission to rein in excessive pay). Lawyers have long ago given up the mantle of being perceived as responsible leaders in the community. This surely will not help the profession’s cause.

I’m not saying that Congress’ (and Treasury’s) latest approach to reining in executive pay is without fault. I firmly believe that Congress should not legislate executive pay and have long said that. But I don’t blame them for trying to stem the tide because those involved in setting pay have long ignored the fact that the pay-setting processes are broken (here’s my explanation for how they are).

Change Won’t Happen Until Boards Want Change

Unfortunately, the sad truth is that even if the legislated/regulated pay fixes were perfectly set so that pay would be aligned with performance, etc., the fixes still wouldn’t work until boards and their advisors wanted them to work. They always seem to find a “work around” to keep the excessive practices flowing. Part of the problem is a culture of “all CEOs are deities and couldn’t possibly be replaceable” as well as a failure to recognize that the client is the company, not the CEO. The current state of executive pay remains a huge corporate governance problem – as pay has unintentionally racheted up over the past two decades – and needs to be rolled back.

Unmasking the Myths

These pay apologists continue to argue that CEOs will run to the nearest private equity/hedge fund if they aren’t paid along the lines of the past. I say let’s see. I think most boards will find that their CEOs aren’t going anywhere fast if given the option to depart, particularly given the state of those funds.

Most of the arguments against responsible pay arrangements revolve around the fact that CEOs have amassed so much wealth that they don’t need the company anymore. Which is exactly the point. I hear the argument that hold-through-retirement won’t work because it incentivizes a CEO to retire and collect their accumulated equity now (Note that our approach encourages long-term holding until “the later of” – and Exxon Mobil has shown that it works. Here’s our analysis on how to implement hold-thru-retirement). That may be the case for this generation of CEOs who have amassed ungodly sums of money – but if pay packages are brought back to Earth, this won’t be a continuing problem because your CEO won’t have amassed $100 million in a few short years and will need to keep the job.

There has to be a modicum of common sense in negotiating these pay packages. How can one be motivated to do a better job getting paid $10 million per year versus $5 million? If you earned 5 mil, wouldn’t you give 100% of your effort? Boards need to get off the peer group survey train and do their own homework, starting from scratch and using internal pay equity as an alternative benchmark.

Now that so many responsible tools and processes have been identified, it’s time that companies start using them. Fortunately, some companies have started – as Mark Borges recently identified in his “Proxy Disclosure Blog.”