You mean that CEO pay is still high?

Posted by Marc Hodak on April 9, 2007 under Executive compensation | 4 Comments to Read

Boy, the WSJ went to town on CEO pay today. Like most news stories, the writing suffers from a disturbing conflation of description and prescription. Descriptively, the rules on disclosure have changed and many companies are reacting to those changes in various ways. That’s interesting stuff for someone like me into executive compensation for professional reasons.

The prescriptive part was what you’d expect of journalists trying to rope in the non-professionals with a sensational story while pretending to offer simple answers to complex issues: a list of “Ten Things,” compiled from suggestions of various activists, experts and “daring” directors. Drum roll, please:

1. Don’t allow the board’s pay consultants to do other work for management
2. Don’t let outside CEO recruits monopolize the pay setting process
3. Don’t offer severance for anyone with a lot of equity or deferred pay
4. Make it easier to fire for cause
5. Be skeptical of “peer group” comparisons
6. Kill unjustifiable perquisites
7. Link long-term incentives with performance goals
8. Divulge precise measures for performance-based payouts
9. Conduct regular check-ups about pay practices
10. Give investors a voice in executive pay

Now, how hard could that be?

It’s not that the list is full of good or bad ideas–there are plenty of both. The main problem with these suggestions is the utter lack of coherence among them with respect to their impact on agency costs, which ought to be the central concern of boards and the public. The writers and their sources clearly fail to distinguish how current compensation plans might be a cause, an effect, or a solution to the problem of agency costs. Instead, their suggestions stem from the premise that CEOs are systematically overpaid. The writers trot out the same anecdotal stories meant to prove this premise to disguise the fact that it remains unproven in any meaningful sense. Even the boldest critics of CEO pay don’t pretend to know what the “right” amount of pay ought to be based on market logic. They simply assert that it should be less than it is now, perhaps some multiple of “average worker pay,” for subjective reasons having to do with “public confidence” or social welfare.

This social welfare premise reveals itself most clearly as suggestion number 6: “Kill perks.” Perks already have to be disclosed, thanks to the new rules, in minute detail. That’s apparently not enough. Executive perks are already counted in overall compensation levels and, in most cases, taxed in a way that ordinary employee perks are not. That’s apparently not enough. Perks are already considered in the total compensation mix and, more than likely, reduce the total cost of compensation relative to what it may have to be absent those perks. The writers or their sources don’t seem to consider that possibility. No–we need to “kill perks.” Sure, the writers say kill only “unjustifiable” perks, but they didn’t even attempt to define that distinction. Where could they even start?

The worst idea on that list is, in my estimation, number 10. Naturally, that is the one idea that legislators are trying to turn into law.