Five Proposals to make Executive Pay benefit Society

It is refreshing to see that the (endless?) discussion about the level of Executive Pay is not completely dominated by pious wishes, hand-wringing and nebulous remedies.

So I read with interest the contribution from Alex Erdmans in a recent article published by CityAm. He is not only professor of finance at London Business School but also a member of the Purposeful Company steering group.

Here is a short summary of the key proposals Erdmans makes:

1 - Give only Equity and Option grants with a long vesting period, preferably until after the executive has left - or even retired.

2 - De-emphasise long-term Incentive plans or bonuses that are only tied to financial targets.

3 - Grant deferred cash compensation or similar long-term awards so that they are eroded in case of bankruptcy.

4 - Launch a Fair Pay Charter and consult workers on the Charter.

5 - Require a binding vote on executive remuneration when less than 75% of shareholders support pay proposals two years in a row.

But while these proposals are a valuable contribution the observer is left with two key questions:

How will these ideas actually be translated into concrete action? And by whom?

And the 64,000 Dollar question regarding the absolute level of Executive Pay is not touched at all. As with so many proposals about pay reform, this is really the elephant in the room. All technical remedies are pointless if at the end all they achieve is that pay is ratcheting higher and higher even when modifications in the way it is set are introduced.

The key question is: Why should an executive be awarded 5, 10 or 20 million if his pay is somehow 'aligned' with company performance? Ultimately this is a question of morality and not economics.

All very well to see BlackRock pledging 'to hold boards' feet to the fire' when it comes to executive pay' when the most critical question of executive pay reform - the way the absolute level of pay is set - is left open.

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Eumedion - just another talking shop?

There is a never-ending procession of seminars, conferences, position papers and industry associations that have improvement of corporate governance as their main aim. One has to wonder, however, what the result of all this activity is. Is it just a disguised form of marketing and public relations? There is also one key deficiency - there is no input from the real end investors, the clients of private banks, asset managers, pension funds or insurance companies. Case in point: Eumedion, only one (!) blog entry since late 2013. Need I say more?

Pay for Performance?

The debate about Pay-for-Performance (only for a select few at the top of the company pyramid) rages on. To justify high pay for good performance as a management tool is based on questionable logic. Naturally those benefiting from the resulting excesses that result are finding reasons to defend this relatively recent ideology. But what about the CEO who struggles heroically in a business that is beset with problems that are out of its control, does an excellent job but has to live with results - while much better than they could have been if he would have made wrong decisions - that do not reach the performance yardsticks that some well-paid 'compensation consultant' has sold to a company board or compensation committee?