How CEO Pay Rises

Directorship magazine carried an article about the process by which compensation firms calculate, and boards approve (and perennially increase) CEO pay. It speaks to the value of disclosure and the hollowness of regulation. It raises the question, "Now that you know, what do you do?"

Recently the SEC required compensation consultants to release the comparable companies they pour into their sausage grinders to extrude an acceptable pay plan. They use a median of 19 firms to calculate the winning number. "According to the [an Equilar] study," Directorship notes, most companies benchmark to peers one-half to two times their size. Stand on the shoulders of giants, and all that.

Now, if you believe there's a correlation between company size and executive pay, you're really on to something.

Now that we know how the game is played (thank you, disclosure regulations), what will be done about it?

1. Government can regulate pay: This is a losing idea now driving all manners of extraordinary behavior as our federal pay czar attempts to bring the surviving, but wounded stragglers of our financial sector, to heel. It's great PR and lousy policy.
2. Shareholders can vote against the excess: Since the majority of votes are cast not by individual shareholders but by the institutional intermediaries who hold their stocks (think mutual funds and pension plans, to name but two), one hand of the investment body would have to slap another. This doesn't always happen.
3. Boards could do the right thing: This would be ideal. But as long as the culture of many boards demands obeisance to CEO who "brung 'em to the party," it's not likely to change. Either boards change the power relationship themselves, or shareholders put people on the board willing and able to do so. The SEC is considering measures that facilitate that process.