Getting a Grip on Executive Compensation

Article excerpt

Shareholders and rank-and-file employees expressed little opposition to astronomical executive pay during the long-running bull market. That's changed completely. Today, there's a unique opportunity to compensate top people the right way.

For many years, General Electric represented all that was right with corporate America-soaring shareholder value, irreproachable governance, and a world-class management team driven by the top corporate general. But in September, cracks appeared in the foundation of the house that Jack Welch built. Revelations of retirement perks such as an $80,000-a-month Manhattan apartment, free satellite television service in four residences, and 24-hour access to a corporate jet did not sit well with the public.

After details about his prodigious package appeared in newspaper stories and gossip columns-information that surfaced during his divorce proceedings-Welch promptly, and voluntarily, pared down the terms of his retirement agreement. His swift response quelled an informal investigation launched by the US. Securities and Exchange Commission, and eventually quieted the tabloids. The very idea that the SEC would target a paragon of corporate America because of an excessive compensation package illustrates the mood of the country: enough is enough.

Federal Reserve Bank of New York president William McDonough chose a September 11 commemoration in New York City to censure CEOs for the "over-expansion of executive compensation." McDonough suggested that the "policy of vastly increasing executive compensation" was the result of bad morals. Average workers share McDonough's outrage. A recent Harris Poll of 2,023 adults found that the vast majority-87 percent of the respondents-believe that executives "had gotten rich at the expense of ordinary workers." Within that group, 85 percent reported they were angry with executive managers, 87 percent felt that top executives receive more than they deserve, and 66 percent indicated that workplace rewards were distributed less fairly than they were five years ago.

The SEC is weighing proposed rule changes from the New York Stock Exchange and NASDAQ that would likely alter the way public companies use stock options and, consequently, how they pay their executives. Compensation committees under pressure from disappointed shareholders, employees resentful of soaring CEO pay, and looming regulatory changes will result in more time, effort, and resources being devoted to executive compensation planning.

This presents human resources leaders with a unique opportunity to step between compensation committees and top management to negotiate executive compensation packages that address concerns about excessive pay while sufficiently rewarding CEOs for performance. Executives who understand the impact of factors such as company performance, size, and the hiring landscape for new executives in their industry can share that information with members of compensation committees. They also can analyze the strength of the compensation benchmark studies that consultants assemble. A relationship between human resources leaders and compensation committees provides workforce management with an opportunity to assume a higher profile in the company.

Jeffrey Bacher, vice president of executive compensation consulting for Aon Consulting in Philadelphia, says that executive compensation projects, which include putting together benchmark studies that corporate clients use to help set annual executive compensation levels, now require 300 hours to complete. Two years ago, he wrapped up similar assignments in 100 hours. "Compensation committees want to make sure they understand the implications of their decisions for the other shareholders," Bacher says. "They're taking a much stronger role in the whole decision-making process."

That kind of heightened sensitivity to setting executive compensation will be reflected in future studies, which will likely show a decrease in average executive compensation in most industries in the United States. …