There was a report about Pay Czar Feinberg talking at the Practising Law Institute’s conference Hot Issues in Executive Compensation 2010 in Agenda this week. It reported on the upcoming survey of bankers’ bonuses but also quoted extensively from his speech. For example:
In light of his TARP experience, Feinberg stressed five basic steps boards should take to ensure fair compensation: (1) Make sure pay is competitive; (2) make sure there is no excessive risk; (3) tie compensation to performance; (4) hire independent compensation consultants; and (5) exercise sound discretion to determine pay.
There’s a lot of best practice principles out there and, in principle, it’s great when companies sign on to them. But I find that in many cases, even where companies have signed on, principle and practice are two very different things. On the other hand, I’m not even sure that I agree with all these principles.
- Make sure pay is competitive? Isn’t that partly what got us into this mess in the first place? Everyone trying to pay their CEO as much as or a little bit more than their peers?
- Make sure there is no excessive risk. Sure, no problem there.
- Tie compensation to performance. Yes, but that should have been number one.
- Hire independent compensation consultants? Well, maybe, but how about just “get independent compensation advice”? It doesn’t matter where it comes from, and sometimes the board is the best place to find it.
- Exercise sound discretion in pay? Ah, there’s the rub. The Lehman Brothers board probably thought it was exercising sound discretion, but we know better. Sound discretion, like beauty, is in the eye of the beholder, so this last principle is fundamentally meaningless. It’s like saying make sure the pay is fair. Who defines fair? The board? The CEO? The shareholders? Mr. Feinberg himself? President Obama? Of course, The Corporate Library would do it best.
Paul Hodgson - Senior Research Associate
