January 9, 2009
Should Congress Limit Executive Pay?
– Broc Romanek, CompensationStandards.com
In this past Sunday’s NY Times, an economist – Robert Frank – wrote an essay about whether Congress should limit executive pay. Although Frank makes some accurate observations, the piece is typical of most written by academics and others who are not familiar with the processes by which executive pay is set (Frank’s lack of knowledge is evident when he states that “salaries” drive job choices – not true since salaries are just a nominal part of CEO pay packages, at least at larger companies). Frank cites the two primary reasons for heightened pay over the past few decades is that market caps for companies have grown and that executives are more likely to change jobs these days.
Although I agree that those two factors have contributed to escalating pay, they are not the major factors. As I wrote several years ago in my “Open Letter to All Journalists,” you need to understand what is happening in the boardroom – particularly compensation committee meetings – to really understand why executive pay has risen. It’s these board processes (eg. peer group benchmarking; severance/COC arrangements because “everyone else is doing it”; annual option mega-grants) that continue to be broken and have inadvertently led to excessive pay. Fixing these processes is critical, including the very difficult task of unwinding past arrangements.
I continue to contend that Congress shouldn’t force boards to fix their processes – boards should be doing that themselves. But if boards don’t soon – and they sure have been slow to figure out their role in fixing the problems of executive pay – it seems inevitable that Congress will act.
And unfortunately, I believe any new Congressional action won’t solve our pay problems because boards (with the help – and even prodding – of errant advisors who forget their represent the company, not the top managers) always seem to find a way around artifical limits, thereby “creating” unintended consequences.
Boards must be accountable and need to take a leadership role here. I remain stunned as most boards still don’t seem to have figured this all out yet…as I’ve blogged before, the few companies taking responsible pay actions appear to have the CEO leading the charge rather than the directors.