Monday, October 15, 2007

Even executives agree their pay is ridiculous

What can I say? Lately, I've written a bit on executive compensation, noting that it seemed disproportionate and utterly unrelated to performance. But I would never have guessed that those same executives (as well as corporate directors) fully agree with all the above, as explained in this FT article (kudos for its wonderfully pithy header).

Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.

Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”.

Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.

Why have we reached this sorry state of affairs?

Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve.

The real answer, of course, is that board members and executives make up a huge "old boy" network. No corporate director wants to take a hard line on pay because a) that would make for some seriously awkward times around the country club, b) all directors and executives make out nicely under the current scheme and c) no one likes to be subject to real scrutiny and, hence, everyone is reluctant to cast the first rock.

Saying that performance can't be objectively measured is pathetic. Sure, it's not easy, but that's what corporate directors get paid to do, along with the armies of compensation consultants they hire to design pay packages.