By Cydney Posner
Following is a link to a column in today's New York Times that reads as if the author had bugged our conference rooms for yesterday's Public Companies' meeting. His column discusses the failure of efforts to rein In executive pay and the ironic possibility that those efforts actually drove compensation to skyrocket.
The author notes that the adoption of Dodd-Frank was supposed to spell victory for those seeking to call a halt to excessive compensation at the executive level, but mandates such as say on pay may actually have backfired: "The latest ‘say on pay' endeavor has turned into a costly exercise that validates almost every companies' pay practices. FactSet Sharkrepellent found that through June 30 of this proxy season, shareholders rejected pay plans in only 39 out of 2,502 companies, including well-known companies like Talbots, Hewlett-Packard and Stanley Black & Decker. Still, this is a 98.5 percent approval rate. I'm sorry, but I'm a bit cynical that 98.5 percent of any group is doing the right thing."
Although Justice Brandeis famously wrote that "sunlight is the best disinfectant," with regard to compensation, the author contends, it has had a "perverse effect." In 2006, the SEC mandated a significant expansion of disclosure of compensation, resulting in pages and pages of proxy disclosure detailing executive pay practices. While these regulations were certainly well-intentioned, "evidence of success is scant. According to the research firm Equilar, the median compensation for chief executives at 200 large companies was $10.8 million in 2010. This was a 26 percent increase from the previous year, which was preceded by a rare decline in 2008…. [T]he Standard & Poor's ExecuComp database shows that executive pay rose about 300 percent from 1992 to 2007. This compares with growth in the same period of about 14 percent in the inflation-adjusted real wages of college graduates, according to the Economic Policy Institute."
The author then makes the "Lake Wobegon" argument, where all children (and executives) are above average: "Disclosure gives them an arsenal to make perception reality. The compensation details of their counterparts provides them with the leverage to request a higher amount from boards. The result: each year executive pay rises ever higher and the industry average is reset."
Although there has been a substantial effort to ensure that compensation is set fairly by independent directors, there are still problems at the board level: "even these independent board members are often not in an effective position to push back forcefully. The chief executive runs the company. And a few extra million dollars is often not worth debating when much more is at stake in terms of profits. It doesn't help their objectivity that independent directors may be using the same strategy to increase their salaries at their own full-time jobs.
"Instead, compensation becomes a process-driven exercise in which the way it is paid — in cash, options or restricted stock — is most important. The final arbiter then becomes yet more costly pay consultants who rely on the same disclosures to determine excessive compensation.
"As owners, shareholders should be the parties with the most interest, but the evidence does not bear this out. It takes time, money and research to effectively monitor executive compensation. For a big institutional shareholder that owns only 1 or 2 percent of a company, the economics just don't make sense.
"Instead, pensions, money managers and the like subscribe to Institutional Shareholder Services and other proxy advisory services. But the firms often focus on the structure of compensation and how tied it is to performance, not the absolute amount.
"Even then, I.S.S. recommended in this proxy season that shareholders vote no on compensation at only about 12.7 percent of Russell 3000 companies, a recommendation that appears to have been mostly ignored. As of June 30, shareholders have refused to follow 90 percent of I.S.S. recommendations to vote no.
The consequence is that shareholders with a say on pay are validating spiraling executive compensation at significant cost to public companies."
That's not to say that all of these efforts are for naught. There are some companies, such as General Electric and the Walt Disney Company, that have revised their policies to ward off dissent, and new regulations have limited conflicts of interest in setting pay. There is also some "evidence that executive pay is more tightly aligned with performance than it was 20 years ago. Another good sign: almost 80 percent of shareholders who voted on executive pay at Russell 3000 companies endorsed an annual shareholder vote as opposed to one every three years, according to I.S.S.
"Executive pay should reward good performance. A man like Steven P. Jobs, who helped create hundreds of billions of dollars in wealth at Apple, should be compensated commensurately." But others are much harder to justify.
"In some cases, high compensation is appropriate; other cases, not. It also may be that the current system forces companies to tie pay more tightly to performance (a good thing) while driving up the absolute numbers.
"But if the goal of these collective efforts is a reduction in compensation, the results are quite disheartening."