October 23, 2005
Executive Compensation Revealed
Gretchen Morgenson, whose Sunday NYT column should be required reading for all business law students, reports on a video of Ed S. Woolard, the ex-CEO of Du Pont, that reveals how CEOs work around compensation committees of independent directors to get sky high salaries. In 2004 the average pay package for a CEO was $10 million, up a whopping 13 percent from 2003.
The compensation committee hires an outside consultant who asks the Human Resources Director of a company what the CEO wants. The CEO sets the figure and the outside consultant writes a report justifying the figure on comparables. The comparables are from other companies in which the CEO can also control his or her own salary. The report goes to the compensation committee and the committee sets the salary in the "top half" of the comparables, otherwise it would be a vote of "no confidence." The new salary of one CEO is then used for comparables of others, who also want "top half" compensation. The salaries thus ratchet each other up. Relying on compensation committees of independent directors is thus a demonstrable failure.
Woolard recommends that consultants be prohibited from asking the H.R v.p., or anyone else inside the firm for that matter, what the CEO wants. These internal communication bars never work, however. Enforement is impossible and back channel leaks are inevitable.
The situation is so bad that the requirement of a supermajority shareholder vote of approval (e.g.,majority of outstanding independent shares or sixty percent of shares voting) for any raise may be the only method of breaking this culture.
TrackBack URL for this entry:
Listed below are links to weblogs that reference Executive Compensation Revealed:
The consultants should only be hired, without input from the executives, by the comp committee. This will only work in a corporation that has an independent nominating committeee.
Posted by: Robert Schwartz | Oct 25, 2005 1:03:50 PM