Conscious Compensation® Principles: Easy to Understand for All Stakeholders

Fred WhittleseyConscious Compensation: The Impact Compensation Blog

 

One of the twelve principles of Conscious Compensation®, as they stand today (and are continually evolving) is that compensation should be “easy to understand for all stakeholders”:

No compensation program should be so complex that stakeholders with a typical level of business knowledge are unable to understand the program.  Bankers, suppliers, customers, and employees all receive compensation from their employers and should be able to understand the compensation of your organization.  Overly complex programs create cynicism and mistrust.

Note that this references stakeholders, not just shareholders.  Public companies must discuss their executive compensation program in the required “Compensation Discussion & Analysis” section of their proxy statement. Even if all shareholders read public company SEC filings, this does not address stakeholders. Some, not most, shareholders read these documents, and few other stakeholders do.

A report by Equilar indicates that these narratives range from those from Berkshire Hathaway (528 words in length) and Costco (3,243 words) to those of Pfizer (19,288 words) and Honeywell (17,747). It’s interesting that these large public companies require such varying lengths of narrative to describe their executive pay programs.

Forthcoming disclosure requirements for the CEO Pay Ratio and Pay-for-Performance analyses will add to the lengthiness of these documents. Journalists have increasing difficulty in getting the story right, and rarely do.  I work with the Seattle Times, and many other publications, every year to help guide their understanding of these increasingly complex disclosures that result from increasingly complex plan designs.

Why is this happening?  One, because executive compensation practices have created public cynicism and mistrust.  This led to legislation requiring additional public disclosure in an attempt to shame companies away from these practices.  Two, because public company boards of directors, and their compensation committees, are terrified that they might receive a negative voting recommendation from proxy advisory firms like ISS and Glass Lewis.  Fear that self-appointed opiners on “corporate governance” might tarnish their resume with a non-binding “no” vote, and the potential shame associated with that.

The proxy advisers strive to ensure that the shareholders get a good return on investment, i.e., make money.  That is a reasonable goal for that group of stakeholders.  The groups making the most money from the legislation and resulting obsession with disclosure, however, are the lawyers and consultants drafting 40-page CD&A verbiage that few if any ever read.

So how are the stakeholders benefitting from this? Few are benefitting at all. Are these disclosures increasing stakeholder understanding of increasingly complex executive pay programs?  No.  Has all of this helped address a public perception that executive pay is excessive?  No.

But all of this regulation and the resulting disclosure has created a windfall opportunity for lawyers and consultants. At least those stakeholders benefit from this.