Sunday, December 27, 2009

High Times

It was hard to resist a chuckle when I read Jason Zweig's The Intelligent Investor column in this weekend's edition of the Wall Street Journal, titled "Does Golden Pay for the CEOs Sink Stocks?" The always readable and sensible Zweig reviews two new studies that "suggest that when chief executives get paid more, shareholders end up earning less."

It was his concluding observation on the results of these two studies, one of which was by a savage critic of inferior governance practices, Lucian Bebchuk of Harvard Law School, that brought a wry smile to my face. "It's high time," Zweig wrote, "for corporate compensation committees — and investors — to start doubting whether the lavish pay packages they endorse actually work."

The "high time" message is one that we here at Directors & Boards communicated almost three decades ago — in a powerful article titled "Is Any CEO Worth $1 Million a Year?" I remember this article well because we published it in one of the first issues after I joined the journal in 1981. It has since become a classic. (And I have on numerous occasions been known to say that if we dusted this article off today we'd have to add one if not two zeros to the end of that dollar figure for the update.)

What's fair and rational to pay CEOs has so many layers. Our board panel for this 1982 article wrestled mightily in peeling this onion. Here were several comments that illuminate the Solomon-like judgment that a compensation committee must bring to bear:

• "Increasingly, the chief executive officer is dealing with external problems — legislation, regulation, and a variety of other things that aren't measured by the bottom line. As much as 40% of the CEO's time is spent in this kind of work. But the bottom line doesn't register that fact."

• "The CEO is involved in laying out where the company ought to be at a future point. Trying to compensate him for results today is not only unrealistic but unfair."

• "The current CEO and top management are really being evaluated by decisions made by someone else four or five years ago — in effect, they are implementing existing strategies. How should that influence their compensation?"

• "In the vast majority of companies, the endeavor to match compensation and performance will be dwarfed by the characteristics of the stock market today."

These are all sophisticated comments of concerns that often don't get reflected in CEO pay critiques. That last comment is particularly telling. One thing it tells me is that three decades ago it was high time for comp committees to be critical of lavish pay packages, that it's high time today, and that three decades from now we'll still be saying that it is high time for comp committees to be better arbiters of fair and rational compensation.