Homer & Friends on Executive Compensation and Say on Pay – Part 2

This column continues the panel discussion on executive compensation and Say on Pay featuring Homer Simpson, Gordon Gekko and Henry David Thoreau.

Homer: Forget the non-CEOs, tell me about the donuts, I mean the CEOs.

Gekko:  Back in the good old days, when I was hustling penny stocks, the CEOs had it made.   They essentially selected the board of their own company and its committees.  If the CEO didn't serve on his own comp committee (if there even was a comp committee) he made sure his friends did, and often he would serve as a director and comp committee member for companies run by those same friends – a  mutual back scratching relationship that ensured friends would stay friendly in fair weather and foul.  Even if a comp committee wanted to take a look at  CEO  compensation, the CEO would hire the consultant that provided data on comp at similar companies, and the consultants all  knew who made the decision on which consultant to hire.

Thoreau:  Doesn't sound very democratic.

Gekko:  True, but I never said democracy was good, just greed.  The old system worked for decades, but the CEOs gradually pushed the envelope too far.  Then the SEC, the major stock exchanges and some nosy institutional shareholders and shareholder organizations got involved.  Now virtually every major public company has a compensation committee composed of independent directors, who have no interlock with any other company where the CEO is a director/comp committee member.  Today's compensation committees also have resources to get data on compensation comparables without going through the CEO.  Board's are looking at company performance in comparison to a sector index, not just the prior year's earnings, and the comparative data gets disclosed too.

Homer:   So why do the CEOs still get so many donuts?

Gekko:  Great question, Homer.  Maybe we should give you that job as Acme CEO.  All the process changes have not put the brakes on CEO pay yet.  It's hard to separate the CEO's performance from the company as a whole. Maybe Acme would have had just as great a year with Homer as CEO instead of Lance Gold , but the comp committee  can't tell for sure.   Also, the board members don't relish friction with the CEO, and the comparables approach to pay decisions adds a desired element of impartiality to the comp discussion.  But those comparables may be perpetuating  a cycle that preserves a premium over market, a premium that CEO compensation gained during the decades when it was controlled by the CEO's themselves.  It's a complex market where the decisions are all made by committee, the potential embarrassment of losing a successful CEO is high (unless he or she leaves for a much bigger company) and, for many years, it seemed like the shareholders didn't care all that much. 

Thoreau:  How could the shareholders not care about wasteful excessive compensation?

Gekko:  Bottom line, it was too much trouble.  When the company had a good year and the stock price was up, no one begrudged the CEO making a few million over some theoretical market value that no one could measure anyway.  When the company tanked, it was a lot easier to sell the stock than to try and figure out why the comp process was breaking down and fix it. Of course comp plans requiring the use of company shares always go to the shareholders under exchange rules, and these  plans would run into a buzz saw of shareholder irritation once in a great while.

Homer:  Shareholders not care?  What's all this “Say on Pay” stuff Lisa keeps yammering about?

Continued in Part 3

Photo Credit: unforth