Earning your keep

The fuss over excessive executive pay continues to grow. Today’s WSJ has extensive coverage of the issue, including a substantive article providing some excellent advice on how boards can reduce or avoid problems in this area.

The key issues are often identified as finding ways to link pay to performance. This is what lies at the bottom of ideas such as stock and options grants for senior managers. But the problems that have cropped up with those programs reveal what is the actual problem: the lack of independence of boards.

Boards that are dominated by company executives, or by executives of other companies engaging in a shell game to hide the undue influence of management over its putative bosses, will be unable to resolve these pay for performance dilemmas no matter how cleverly binding the solutions appear to be. If the same people who the vault is supposed to deny entry to are those who designed it, then they’ll know either the combinations, or the security measures employed and how to circumvent them.

So, what is the solution? One attempted by certain companies is mentioned in another item from today’s WSJ: simply cap executive compensation to a multiple of the average employee’s pay. The problem is that managers who excel in companies like this are soon wooed away by recruiters and other firms promising substantially higher rewards. Only the strongest corporate cultures binding together exceptionally loyal staff at all levels can avoid such pressure. This can occur when those at the top worked their ways up through the ranks.

Obviously, this may be another strong argument for promoting from within for top jobs. But what is it really saying about executive compensation or performance? Nothing, actually - it’s merely setting an arbitrary cap on the one without effectively addressing the other, which is the real issue.

This is where the emphasis needs to be placed: not on pay - that’s just a symptom of a problem in an age of regal executives insulating themselves from reality and accountability - but on board effectiveness, which is the only possible agent for the establishment of these all-too-often missing elements in the top-level guidance of today’s public firms.