Fixing Executive Compensation Excesses - BusinessWeek

Fixing Executive Compensation Excesses - BusinessWeek

Business Week, Viewpoint
February 5, 2009, 6:02PM EST

Fixing Executive Compensation Excesses
The board members who decide a CEO's pay have a fundamental conflict of interest, and shareholders need to have more of a say
By Edward E. Lawler III

Excerpts:

Many boards are not in a position to say no to the CEO. In the U.S., the CEO is usually the chair of an organization's board and also selects its board members. In addition, continued tenure on the board often depends on the willingness of the CEO to support the reappointment of board members. As a result, it is the one place where pay is determined by people who report to the person whose pay is being set.

How do board members feel about the level of the executive compensation in the U.S.? We have been focusing on this issue as part of an ongoing survey of board members, conducted by my Center for Effective Organizations at the University of Southern California and Heidrick & Struggles. Board members do acknowledge that CEO compensation is frequently too high. For the last 10 years more than 25% of board members have said it is generally too high, and 50% agree that it is too rich in some high-profile cases.

Given this attitude, one might wonder why board members have not been more active in controlling CEO pay. Part of the answer lies in their opinions about the compensation of their own company's CEO. In our recent survey of 115 boards, 85% of board members report that their CEO's compensation program is effective. Board members tend to feel, "We're okay; it's the other guys who are the problem." Given this and that they work for the CEO, it is not surprising that boards continue to support high levels of CEO compensation.

There are a number of pros and cons associated with shareholder votes, but that is the change most likely to leave companies with the opportunity to design effective compensation plans without government intervention—and at the same time satisfy shareholders with respect to the level of CEO compensation. If it fails to have its intended affect then and only then should we consider government mandated restrictions on executive compensation payments.


Read Full Article: http://www.businessweek.com/managing/content/feb2009/ca2009025_072667.htm?chan=careers_managing+index+page_top+stories
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Edward E. Lawler III (http://www.edwardlawler.com/) is the author of Talent: Making People Your Competitive Advantage (Jossey-Bass, April, 2008) and Distinguished Professor of Business at Marshall School of Business at the University of Southern California. A leader in the fields of organization development and HR management, he is also director of the Center for Effective Organizations at USC.



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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.