Friday, May 01, 2015

Executive pay is an unresolved issue of governance

Here's an interesting statistic, cited in an article in the FT,  about a survey done on executive remuneration: 54% of non-executive directors polled think the executive remuneration model is broken.  I suspect the percentage in the public at large would be much higher.

What are the things that are generally perceived to be wrong?

1. CEO pay (which is a proxy for top management pay) is obscenely high in absolute terms: the average pay in the US in the top 350 companies is$15.2 mhn.

ii. CEO pay has risen much faster than the stock market or the average worker's pay. As a result, the ratio of CEO pay to average worker pay - 296:1 in the top 350 companies in the US- is unaccetably high

iii. CEOs are rewarded even if their companies haven't done well.

There are any number of explanations for the explosion in CEO pay. At one extreme, there are people who think that the increase in CEO pay reflects market forces. At the other extreme, people think that CEO pay is a reflection of poor governance and dysfunctional boards of directors.

What is to be done about high CEO pay? Again, there have been any number of solutions proposed: better disclosure, stricter and more transparent pay, shareholder say on pay, curbing or getting rid of stock options, paying CEOs only in cash and restricted stock, getting rid of variable pay altogether.

Better disclosure certainly should be a starting point. This should include disclosure on maximum to minimum pay ratios, as proposed currently in the EU. But the long-term solution is to have tighter regulatory norms and boards that are constituted very differently from today. You cannot expect 'independent' directors to be independent as long as they are beholden to management for their jobs. We need some independent directors at least to be selected independently of management- by stakeholders such as institutional shareholders, banks and employees.

Will this happen? Alas, not in the near future.

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