Give Shareholders Say on Pay
Anne Sheehan is the director of Corporate Governance for the California State Teachers' Retirement System. This post is part of the HBR Debate: How to Fix Executive Pay.
Executive pay is broken.
The ratcheting up of executive pay contributed substantially to the economic crisis, because the risk and reward equation got out of balance. Yes, you have to pay for performance and you want your leaders to take some risks, but only informed risks. Many companies have rewarded very risky moves made without much understanding of the implications.
The way companies have been setting pay also has contributed to compensation inflation. Executives note the rising incomes of people they consider their peers, and they expect to keep up; nobody wants to be below the median. And so it continues. That's not a good way to determine pay levels. Other people's salaries are but one data point in the equation, but not the primary variable.
I also think that the matter of pay has moral connotations, when you consider that regular working people have lost half of their 401ks, and many have lost their jobs, only to see over-the-top bonuses paid out to those responsible for the mess. That moral outrage needs to be acknowledged, and if companies don't respond to the issue, the government will.
That won't be a pretty sight. Visit YouTube and watch Ed Liddy testifying at the AIG hearing, trying to explain some of the firm's excesses.
What's the solution? CalSTRS doesn't support federal regulation, but we do support say on pay, and we're asking our portfolio companies to allow shareholders advisory votes on executive compensation policy. We're also expecting greater transparency and coherence in these policies — written in plain English — and independent compensation committees. We've shared executive compensation principles and guidelines with 300 largest portfolio companies. We are an active shareholder, and we want their interests aligned with ours.
To people who say you have to pay them a lot to keep them? I say, in this economy, where will they go? I don't have any objection to paying well for high performance; I have a problem with the overly compensated CEO (sometimes, the guaranteed-to-be-compensated CEO) whose company goes off a cliff.
Boards and, especially compensation committees, need to focus carefully on their compensation plans, how they are structured, and the consequences of shortsighted pay models. They need to demonstrate to shareholders that they understand the sentiment of the country on this issue and they they "get it."
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