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Could HR oversee the end of excessive CEO compensation?
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
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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