Executive Compensation-Part II

Check out Joe Nocera's excellent article on the aftermath of Kenneth Feinberg's, the pay czar, rulings on the compensation of the "25 most highly paid executives at the seven big companies that still hold billions of dollars in government assistance." According to Feinberg, "the strategic construct is that that their compensation should be tied to the performance of the company."

Nocera minimizes this "strategic construct" as differing only in degree from pay policies that already exist and not addressing "in what matters most." He writes:

"But there was always a loftier goal for Mr. Feinberg. When he first took this thankless assignment from the Treasury Department in June, the hope was that when he made his rulings, he would help change the etos of executive pay, not just the seven companies that came under his perview, but all across Wall Street and, for that matter, across corporate America. When asked by a CNBC reporter on Thursday whether he believed the pay structure he established would lead to changes across Wall Street, he replied, "I hope so."

But the truth is. It won't. No pay czar can do that. That's something only shareholders can do.

Nell Minow, the co-founder of the Corporate Library and a fierce proponent of executive compensation reform, didn’t even think that was particularly likely. “The only way you’re going to change things is to throw the bums out,” she said caustically.

The “bums” she had in mind, of course, were corporate directors, especially the ones who sat on the compensation committees. Right now, it seems likely that Congress will pass a “say on pay” bill, giving shareholders the right to vote thumbs-up or thumbs-down on executive pay. (It has already passed in the House of Representatives.) But that is just a starting point, since, after all, say-on-pay would be only an advisory vote, and wouldn’t be binding on the board.

Instead, Ms. Minow believes that shareholders need the ability to vote directors off the board if they feel they are doing a bad job — on executive pay or anything else. Right now, the deck is so stacked that it is nearly impossible, especially since many companies don’t allow simple, majority votes to elect (or reject) directors. But the most straightforward way to shrink the oversize pay of Wall Street executives — and, more generally, curb the excesses of executive pay — would be to make directors more accountable to the company’s shareholders.

As well-meaning as Mr. Feinberg is, and as diligently as he worked through his assigned task, he shouldn’t be the pay czar. No one person should be. That’s a job more properly reserved for shareholders. You know, the ones who own the company."
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Joe Nocera, Pay Cuts, but Little Headway in What Matters Most, New York Times, October 23, 2009


Buffett has been saying this for years

"When the manager cares deeply and the directors don’t, what’s needed is a powerful countervailing force – and that’s the missing element in today’s corporate governance. Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners – big owners. The logistics aren’t that tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior. In my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved.

Unfortunately, certain major investing institutions have “glass house” problems in arguing for better governance elsewhere; they would shudder, for example, at the thought of their own performance and fees being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they support these men.

The acid test for reform will be CEO compensation. Managers will cheerfully agree to board
“diversity,” attest to SEC filings and adopt meaningless proposals relating to process. What many will fight, however, is a hard look at their own pay and perks.

In recent years compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees. (If you can’t tell whose side someone is on, they are not on yours.) True, each committee is required by the SEC to state its reasoning about pay in the proxy. But the words are usually boilerplate written by the company’s lawyers or its human-relations department.

This costly charade should cease. Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners. They should explain both how they think about pay and how they measure performance. Dealing with shareholders’ money, moreover, they should behave as they would were it their own.

In the 1890s, Samuel Gompers described the goal of organized labor as “More!” In the 1990s,
America’s CEOs adopted his battle cry. The upshot is that CEOs have often amassed riches while their shareholders have experienced financial disasters. Directors should stop such piracy. There’s nothing wrong with paying well for truly exceptional business performance. But, for anything short of that, it’s time for directors to shout “Less!” It would be atravesty if the bloated pay of recent years became a baseline for future compensation. Compensation committees should go back to the drawing boards."
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Warren Buffett, 2002 Letter to Berkshire Hathaway Shareholders

"Irrational and excessive comp practices will not be materially changed by disclosure or by
“independent” comp committee members. Indeed, I think it’s likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent. Compensation reform will only occur if the largest institutional shareholders – it would only take a few – demand a fresh look at the whole system. The consultants’ present drill of deftly selecting “peer” companies to compare with their clients will only perpetuate present excesses."
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Warren Buffett, 2006 Letter to Berkshire Hathaway Shareholders