The article on pay advice (Morgenson, 2006) lays out the details of a conflict of interest that permeates the world of executive compensation. In the example of Verizon, how can Hewitt make unbiased suggestions concerning bonuses and salaries for executives when it depends on those very executives for its other business with Verizon? As is often discussed in politics, this is a situation in which quid pro quo is almost impossible to avoid. The fact that both Verizon and Hewitt went to great lengths to hide what they are doing was a danger signal in itself.
As a member of the board, I would take several steps: first, hire truly independent, unbiased compensation consultants; second, make all decisions and transactions transparent; and third, change the composition of the board of directors itself so that it is no longer packed with other CEOs / former CEOs. Finally, I would ensure that executive compensation is reasonably related to the financial condition of the company — CEOs should not be paid enormous sums when the company is in trouble and the shareholders are bearing the costs.
As long as the compensation consultants’ company continues to wear more than one hat, providing other services such as human resources, pension plans, and health benefits, the consultants cannot be completely independent. The article notes that only one company providing compensation consultation does not operate other services. However, it is possible to hire a different company for compensation advice; this would provide at least some separation (Murphy & Sandino, 2010).
All activities of the compensation consultant and committee must be transparent. Again, this is comparable to the lack of disclosure in campaign finance. As long as no one is identified and there is nothing in writing, it is impossible to hold anyone accountable for the results. Disclosure is essential for accountability (Morgenson, 2006).
The Board of Directors for one company should not consist entirely or even mostly of CEOs and former CEOs, because they are not motivated to ensure reasonable and fair compensation for executives. This is similar to sending the fox to watch over the chickens — it is not realistic to expect success. Members of the Board should be entirely separate and independent, as much as possible (Conyon, 2011).
Finally, I would ensure that CEOs do not get paid high salaries, bonuses, and other compensation when the companies they run are doing poorly. This practice rewards poor performance and leaves stockholders out in the cold. Justice would be better served if compensation were tied to performance (Bebchuk et al., 2010).
Portions of the Dodd-Frank Act, signed into law in 2010, laid out new regulations regarding independent consultants and committees that deal with executive compensation. This was in response to the 2008 financial crisis, in which CEOs of the banks and other companies that failed received huge payouts in money, stock options, and benefits (Conyon, 2011).
- Bebchuk, L. A., Cohen, A., & Spamann, H. (2010). Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008, The. Yale Journal on Regulation, 27:257
- Conyon, M. J. (2011). Executive compensation consultants and CEO pay. Vanderbilt Law Review, 64: 397.
- Morgenson, G. (2006). Outside advice on boss’s pay may not be so independent. The New York Times, http://www.nytimes.com/2006/04/10/business/10pay.
- Murphy, K. J., & Sandino, T. (2010). Executive pay and “independent” compensation consultants. Journal of Accounting and Economics, 49(3), 247-262.
- Titman, S. and Martin, J. (2011). Valuation: The art and science of investment decisions. 2nd ed. Boston, MA. Pearson Education, Inc.