The World is Changing: Why Can't CEO Pay?

With the very real possibility of executive compensation constraints being part of the Congressional bailout legislation, it seems like a good time to examine why executive compensation practices haven't changed - even though 99% of this country believes they should. With Wall Street and our financial markets undergoing a complete transformation and the regulatory framework certain to be reformed in ways we never imagined, why does CEO pay remain "untouchable" for many boards and their advisors?

Here are a few of my thoughts:

1. Lots of Lip Service - Personally, I am tired of having conversations with colleagues who tell me that compensation committee meetings really have changed. I believe that. The problem is it's just the committee processes that have changed - to pass judicial muster after Disney - but the committee's actions remain the same. When I have these conversations, it's telling how perfunctory committee meetings used to be!

2. When There is Responsible Change, It's Driven by the CEO - Most often when I talk to someone who regularly advises boards, I hear that the few companies that really make responsible changes are the ones where the CEO speaks up and voluntarily asks for the change. Sadly, boards and compensation committees are not the ones driving responsible change.

3. Debunking "Everyone Else is Doing It" - How often has this justification lead us down the garden path? Just because everyone is using peer group benchmarking instead of alternative benchmarking - like internal pay equity - doesn't make it right. In fact, some plaintiff lawyers may argue that it's now widely known that 15 years of broken peer group benchmarking has made that methodology unreliable - and that boards that continue to heavily rely on that broken database are not fulfilling their fiduciary duty to be reasonably informed. (And remember that today's excessive CEO pay packages are a relatively new phenomenon, only about 15 years old as I've explained before).

4. You Won't Lose Your CEO If You Trim $10 Million - Probably the most frequent justification to maintain the status quo is that the CEO will walk if the pay package is cut from $20 million to $10 million. I find this an empty argument in most cases (and for the many really hurting in today's economy, even the $10 million produces anger). Sure, the grass is always greener - but the reality is the grass is brown all over right now.

I realize that having a pay-cutting conversation is hard - but there are baby steps that can be taken to bring executive compensation back in line. Start with implementing a clawback provision with teeth, eliminate severance arrangements that have no purpose and require executives to hold-til-retirement. Use better tools to ensure a fairer process, like internal pay equity and wealth accumulation analyses.

5. Congressional Solution Not Preferred, But Perhaps Inevitable - I don't believe Congressional intervention into pay practices is a sound idea, but the failure of boards to fix pay practices on their own has brought us to where we are today. And it shouldn't be a surprise that Congress is now focusing on this topic - the House has held hearings on CEO pay repeatedly this year and both Presidential candidates have stated their intention to pass "say on pay" legislation next year. I believe we are at a "last chance" stage for boards to truly get their act together or else we will wind up with laws that do it for them.

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- Broc Romanek