September 30, 2010

To Clean Up CEO Pay, We Must Get Facts Straight

In a recent Los Angeles Times op-ed about reining in executive pay, Sarah Anderson and Sam Pizzigatti assert that the “say on pay” clause of the financial reform legislation – which gives new powers to shareholders regarding CEO compensation – will not clean up the “executive pay mess.”

They are right, of course. But I see some ways to expand on their argument.

I agree it is naïve to think that shareholders will be able to make smart executive pay decisions simply because corporations now have to disclose to them how their pay packages are aligned with financial performance. In fact, shareholders who already have “say on pay” and have voted against executive compensation arrangements have typically been frustrated [by the historic lack of transparency in the proxies and their own inability to analyze the data provided by the company to accurately determine if pay is indeed aligned with performance. Only when companies provide shareholders with tools that enable them to analyze what it all means will shareholders be able to effectively use their newfound influence.

Although their argument is technically correct, the authors’ portrait of the fundamental “problems” of CEO pay in the post-Recession era isn’t comprehensive. Citing one of the most egregious examples of golden parachutes – former CEO of Omnicare – Anderson and Pizzigatti neglect to mention that the majority of CEOs are not overpaid. The research from our book, “Fair Pay, Fair Play,” proves that it’s a few “outliers” (like Omincare) which pay above the 95th percentile and exhibit low performance which are skewing the statistics and feeding public furor over the issue. “Another example is Oracle CEO Larry Ellison, who is paid far above the market (contingent on performance) and is consistently ranked as one of the richest men in the world due to the company’s aggressive target compensation strategy.”

If Congress hopes to fight excessive executive compensation through “Say on Pay” – or hopefully more effective future regulations – we experts, researchers and analysts better need to make sure we highlight the real issues and work together on effective solutions.