In 1991, Bud Crystal released the book “In Search of Excess,” a scathing commentary on executive pay. I was a newly minted Compensation Consultant in a large financial institution at the time, and nowhere near as cynical as I am now. I read the book, but it didn’t really resonate; I worked primarily with non-executive pay.
Then I was asked to complete a market analysis on the total compensation of the CFO. I did all my research and analysis as I would do for any other position, and shared it with my boss. The market data and analysis I presented did not support increasing the CFO’s compensation.
Oops. Wrong answer. This was my introduction to creative analysis. The bottom line was, the CEO wanted to increase the compensation of the CFO, ergo, he needed support for that action. I don’t exactly remember the particulars, but it went something like “a little credit” for his “other responsibilities,” tacking on a factor for his long service, and weighting the market data more heavily for a national presence rather than a regional presence, since “we were growing” and voila…the CEO got the justification he wanted.
Fast forward fifteen years. I led the Compensation practice in a Fortune 500 organization, coordinating the executive compensation work of the Board of Director’s Compensation Committee and dealing with ” the executive compensation consultant”. This was not my first experience with consultants – they are plentiful in the world of Compensation, they wield enormous influence over the Board, and they make boatloads of money.
Recently I read Gretchen Morgenson’s March 21, 2015 article in the NY Times, “Ways to put the boss’s skin in the game.” If you aren’t familiar, Morgenson wrote “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Created the Worst Financial Crisis of Our Time,” an expose on the early warning signs we missed on the sub-prime mortgage debacle and those responsible for the implosion.
The premise in her NYT article “Ways to put the boss’s skin in the game” is that executives are encouraged to take big risks for big gains, receive big rewards if the risk plays out, but are not accountable if the risk tanks. Shareholders pay the price, not those who made the decision and she reports on new proposals to counteract this conundrum.
In one case, Citigroup shareholders will vote on a proposal requiring top executives to contribute to a “pool of money that would be available to pay penalties if legal violations were uncovered at the bank.” Morgenson shares the ongoing dialogue about this proposal in her article.
In a second case, a lawyer for the “nation’s watchdog over the bankruptcy system,” proposed in a Michigan law journal article that calls for “the creation of a contract to be signed by a company’s top executives that could be enforced after a significant corporate governance failure,” requiring payback of compensation.
Needless to say, her article got my attention and I had a few comments to add to what she wrote. But the NY Times didn’t invite comments, so I will make my comments here.
You’ve got to be kidding, right? Do you really think that either proposal could possibly fly? Let me tell you why it can never happen (at least without major culture change…)
I want to believe that most C-Suite executives can be convinced to do what is right but, unfortunately, for the most part, money trumps ethics. My experience tells me they can also be convinced to “take what they deserve.” But, it’s the expectations of “what they deserve” that gets excessively inflated, thanks to the executive compensation consultants.
These folks swoop in with their peer data, and convince an otherwise (maybe) humble CEO that he deserves to be paid competitively. I can close my eyes right now and see these consultants (and their hordes of researchers and lawyers) looking for each and every reason why such a deal would throw off the competitive landscape, and the company would risk the loss of top talent, putting together a powerful PowerPoint argument for their clients. In the end, it’s really not a hard sell. The C-Suite executives want the justification, the consultants will give it to them and the proposal will simply die. For example, in the case of Citigroup, the bank tried to block the proposal from being included in the proxy. What does that tell you about their interest in holding the C-Suite accountable?
In her article, Morgenson closes by suggesting that if a significant number of Citi shareholders support the proposal, it would “be a big step forward in helping avoid another plague of corporate disasters.”
Indeed it would and it would send a strong message to the “C suite”. I hope that the Citi shareholders take the time to read the annual proxy and pay particular attention to the fact that a “public company must comply with the Securities and Exchange Commission by disclosing “the criteria used in reaching executive compensation decisions and the relationship between the company’s executive compensation practices and corporate performance.”
What to do?
Based on my experience preparing and watching compensation proposals to Board of Director Compensation Committees, these Directors need to challenge the status quo and hold C-suite executives accountable with defined consequences for making ill conceived, overly risky decisions. Look beyond the consultants “data” and fancy PowerPoint presentations and ask some really good questions, like “how can we balance the risk and reward for business decisions, and create a meaningful consequence for those making the decision?” Follow up by, “if we do create meaningful risk and reward, what might the unintentional consequences be, and are we willing to live with them?”
Competitive pay and “retention of top talent” is critical for organizations to be successful however, fiscally sound and wise decision making is as much or more critical over the long term. Shareholders and Boards of Directors must step up and demand accountability from the C-Suite for poor decision making by engaging in candid dialogue about the risk and reward beyond the fancy PowerPoint.
Directors of publicly traded companies are paid nicely for their work and fiduciary responsibility. It’s time to earn their pay.