A recent study by a Congressional panel found conflicts of interest abounded in the executive pay consulting field (Reported in The New York Times, 12/6/07). No kidding, Sherlock!
My father was on our local city commission and he shared with me the way that city staff frequently would tell the commission that staff was underpaid and that a consultant was needed to determine proper salary increases. Staff would present the commission with a “short list” of 3 to 5 consultants from which to chose. While this range of choices created the appearance of independence and the commission certainly could pick anyone it wished, as a practical matter, it chose from the list presented and, of course, every consultant listed would recommend a substantial pay raise.
Dad always took the free market approach: “The city seemed to have no problem filling vacancies. We were not losing too many folks. So where’s the problem?” Realistically, you always lose some people seeking greener pastures. That’s life. If no one ever leaves for a higher-paying job then perhaps you are over-paying.
CEO salaries are skyrocketing and boards of directors defend the salaries by pointing to compensation consultants. But there are relatively few compensation consultants out there. And they figured out a long time ago that the ones who don’t come back with a recommendation for a nice, fat pay package rarely get invited back.
The boards of the Fortune 500 are a rather clubby lot, as are the consultants who serve them. Rarely does one rise to such an exalted height by being a boat rocker. All too often one “gets along by going along.” While that may result in amiable board meetings, it rarely serves the best interests of the stockholders, the nominal owners of said corporations.
CEO compensation packages will stay rigged until Congress allows the stockholders to take control of the boards of directors of America’s corporations, ending the current “Soviet-style” elections that select corporate boards today.