Incentives of the comp “players”

Posted by Marc Hodak on March 13, 2007 under Executive compensation | Be the First to Comment

The W$J gave front-page prominence to executive compensation, again. Today’s article highlighted five “players” and the groups they represent. Jesse Brill, “The Networker.” urged a tally sheet for directors. Lucian Bebchuk, “The Professor,” is known as the main academic proponent of the “managerial power” thesis of why pay has grown. “The Bureaucrat” is Meredith Miller, assistant treasurer of the state of Connecticut. “Mutual Fund Trustee” John Hill, from Putnam Funds represents institutional investors. Finally, “The Union Leader,” Edward Durkin, helps oversee the giant pension fund of the United Brotherhood of Carpenters and Joiners.

Other than having nicknames strongly reminiscent of a 70s heist flick, these “players” share an interest in what the authors call shareholder activism on executive compensation. But what interest, exactly, does each player have? What type of activism does each player promote? When you get into the article, it turns out that their interests and methods only partly overlap. The point of overlap, of course, is reducing the perceived abuses of CEO pay. But they define the scope and nature of thoses abuses differently, and pursue correspondingly different policies to rectify them.

To begin with, each “player” has a different conception of the “problem” of executive compensation. Some of them object to particular pay practices at particular firms. Others see a wider problem of executive greed that requires a more shotgun approach. Others argue for fundamental changes to what they see as a systemic, corrupt relationship between directors and the executives they are supposed to oversee.

Not suprisingly, those with a more targeted view of the problem take a more targeted approach to solving it. They claim to get good results from one-on-one discussions with directors and executives about particular issues. Others add public pressure to get or keep the dialogue going. Some will get into loud proxy battles. Some are publicly agitating for federal government policies that will give them more clout in discussions with the board, overriding our current system of jurisdictional or market competition altogether.

The underrepresented crusaders, or course, are the journalists who sell papers appealing to envy in the fight against greed. The “Movement to Limit CEO Pay” is arguably a better description of the wish of the editors and most readers than the ultimate goal of all of these “players,” though it appropriately describes the goals of many. The authors of this piece have a clear bias toward activism. Activism is fireworks. Fireworks draws the crowd. This is not to say that occasional fireworks are not a good thing. There is nothing wrong with investors making their feelings known about any matter affecting the company. But activists are publicity seekers by nature, and publicity is the lifeblood of journalists.

Unfortunately, this blood attracts the ultimate publicity seekers–politicians. For politicians, activism means legislating one solution for everyone. Although Bebchuk wrote in his book “Pay Without Performance” that he didn’t believe in legislated solutions, he is now clearly at the vanguard of proposing them. If it’s true that all roads lead to Rome, activists are generally at the head of the procession.