CEO compensation: the sound of one hand clapping

The most recent round of pressure on boards arises from episodes such as the spate of options back-dating which represents the latest eruption of malfeasance scarring the corporate landscape. People are losing patience, at long last, with rubber-stamp boards that approve every senior management initiative with no scrutiny. Consequently, audit committees have been receiving critical attention for letting these gratuitous transgressions pass with unanimous abrogation of the board’s duty to its shareholders.

Now, it’s the turn of the compensation committees. The routine response to the questioning of exorbitant pay packages for CEOs is that they must be rewarded for adding value to their companies. But a study, reported earlier this week, indicates that CEO compensation is growing 1/3 to twice as fast, respectively, as net profit and shareholder returns, casting suggestions of reward for performance into doubt.

According to a recent item in Forbes.com, an area of particular interest in the behavior of compensation committees is their relationship with the consultants they hire to advise them. It seems that consultants who recommend high pay for CEOs can later find themselves retained by those CEOs for additional work for the company proper. Various devices, such as planting comparable CEO pay package samplings with a few weakly related (not really very “comparable”) but very highly paid ringers which skew the average artificially skyward, are used to attempt to veil the duplicity.

Underlying much of this problem, however, isn’t so much that one hand rubs the other, as that one hand is the other. The combination of the positions of CEO and Board Chair is a fundamentally inappropriate practice pregnant with both ethical failure and moral disingenuousness that is manifesting itself ever more dishonorably, it sometimes seems, with each passing day. When the CEO is the Chair, no amount of recusing one’s self from this committee altogether or that one’s deliberations can expunge the pernicious fact that the fox is positioned to plunder the hen house in the presumably unimpeachable guise of its protector.

The same hand is guiding the activities of two bodies the interests of which do not naturally coincide. Instead of two hands collaborating to benefit owners, one hand is presuming to determine and advance those interests, and is doing so from a perspective that is the least capable of all of objectively teasing them out.

And that is presuming the best of intentions. All too often, it simply results in cynical celebration - albeit as silent as possible - of its own self-reinforcing privilege.

Reform of corporate governance must begin by addressing and rectifying this fundamentally unstable situation, or we will simply continue to kid ourselves that there will be no final accounting, or that, if there is, we won’t be the ones to pay it. But, we always are, aren’t we?