Reining In Executive Compensation: A Q&A with Charles Elson

Could HR oversee the end of excessive CEO compensation?

By David Ward Sep 24, 2014

1014-Cover.jpgThe era of stunningly high CEO pay could soon be coming to an end, suggests University of Delaware finance professor Charles Elson, one of the foremost U.S. authorities on corporate governance issues. He believes that a number of factors—public outrage and shareholder pressure, along with new rules like “say on pay”—will convince many boards of directors that a re-evaluation is in order. And that’s likely to open the door for HR to play a bigger role in executive compensation.

For all the recent commentary over excessive CEO compensation, are many top bosses actually overpaid?

I think they are. Much of it has to do with excessive reliance on the peer system, in which a CEO’s pay is determined by how CEOs at other companies are paid, as opposed to basing it on a company’s internal pay structures.

Things have gotten better in recent years due to increased sensitivity about CEO pay from company boards; stronger interest in CEO compensation from investors; and new rules like “say on pay,” which requires a shareholder vote on executive pay—though that vote is only advisory. But because of this peer system, there’s still this bias toward escalating pay each year, which I think further decouples pay from performance.

Is giving CEOs of public companies stock or stock options a solution in that it links compensation to company performance?

I believe in restricted stock as opposed to options. Options act as an expectancy for upside with no downside risk for the holder. But the worst that can happen is you don’t get what you expected. Restricted stock, however, directly aligns the CEO’s interest with shareholders’. If you do a poor job as CEO, not only do you not get an increase in value, but you lose wealth as the value of your restricted stock holdings fall. Plus, most restricted stock must be held for a long time, so a CEO isn’t tempted to manipulate short-term earnings.

Can HR play a more active role in setting CEO compensation?

I think HR will end up playing a great role as companies begin to move away from the peer system toward a more internal-based scheme for determining CEO compensation. HR will have to ensure that the CEO’s pay scheme is consistent with the organization’s compensation philosophy and reflects its values. Moving to an internal scheme will end up being quite a boon for the HR department, which will be responsible for designing the program. That will elevate dramatically the role and responsibility of HR officers.

What can HR do to ensure that executive compensation doesn’t affect the attitude or performance of rank-and-file workers?

Transparency is critical, as is a thoughtful explanation to a company’s investors as to how the CEO compensation scheme is arrived at and why it’s internally consistent and fair relative to the rest of the organization. Remember, the people who most often read the portion of a public company’s proxy that deals with compensation are the employees themselves—and that’s why the proxy has to be designed to effectively explain why the CEO’s pay fits this company’s internal philosophy.

With the economy recovering, do you expect public outrage over excessive CEO compensation to diminish?

I don’t feel the issue is going to go away. The more disparity there is between the pay for CEOs and that of other employees, the greater the concern will be among the rank and file. Companies function well when people believe they are part of a bigger purpose and larger team—and when the leader’s compensation becomes so decoupled from the team philosophy, you’ve got a problem.

David Ward is a freelance journalist based in Southern California.

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