Reporting on executive compensation

Posted by Marc Hodak on March 9, 2009 under Reporting on pay | Be the First to Comment

An article appeared today titled “Top-exec pay train runs full steam ahead.”  Apparently, companies are paying fat bonuses to their CEOs even though their firms failed to achieve their targets.

“Executive pay is the ultimate shell game,” says Richard Ferlauto, a longtime critic of corporate compensation practices and director of pension investment policy at the American Federation of State, County and Municipal Employees. “Boards come up with all sorts of new ways to pay people whose performance shows they don’t deserve it.”

That Dick Ferlauto, he’s always good for a soundbite.  He also says, “What does ‘pay for performance’ mean if you ignore performance?” Yeah!

But wait.  Another article today said that “CEO bonuses are falling fast: study.”  That story says that bonuses for CEOs fell over 19 percent last year, and that was after a 4.5 percent decline from the year before.  What gives?  Both headlines can’t be right, can they?

It turns out that the first story was written based on exactly three examples.  Somehow, all three of those examples illustrated the promise of the headline.  Actually, one of the three stories doesn’t even do that–the company paying the bonus actually performed well.  The complaint about the third company was that they awarded their CEO a golden coffin benefit.  The headline in the first article implies that that “Top-exec pay train” applies to a entire class of executives, a significant number of people.  The fact that it doesn’t, that applies to just three people, kind of makes that headline suspect, to say the least.

The second story was, as implied by the headline, based on a study.  In fact, it was based on a random sample of 173 companies in an Equilar analysis.  In other words, this story was based on empirical research that ended up countering the anecdotally supported claims.

If two points make a trend, I would say the lesson here is to ignore any story that does not include a study to back up the anectdotal claims implied by selected examples.

For better or worse, though, headlines are an art, not a science.  Their art is purely and simply to get you to literally buy the story.  If I were half as liberal as the average reporter in the mainstream media, I might suggest that the government mandate that stories be labeled “anectdotal” vs. “study” so I could save some of time reading time.  But I understand regulatory behavior enough to know that as soon as I create that distinction, the market will work furiously to blur it as completely as possible, so paper can continue selling their sometimes false stories under often false pretenses.