CEO compensation consultants Ira Kay, John Ellerman, and Sarah Blivens make the best arguments they can to support the current system of CEO pay in their firm’s newsletter.
We believe that CEO compensation is a major competitive advantage for U.S. companies due to our own and extensive academic research, our decades of consulting with thousands of major companies, and the strong stock market performance created by the earnings growth of those companies. The CEO pay model has helped because a CEO’s pay package is directly linked to operational and stock price performance. In addition, high CEO stock ownership in response to shareholders and corporate stock ownership requirements have created even stronger alignment to shareholders.
They respond to two articles critical of CEO pay with three points:
1. Say on Pay (SOP) votes indicate true shareholder support for corporate executive pay packages;
2. The use of non-GAAP performance metrics in measuring incentive compensation performance is appropriate and meaningful; and
3. At most companies, appropriate peer groups to benchmark executive pay and company performance are determined after a rigorous process.
1. This is nice to hear, given the shrill hysterics over the prospect of a non-binding vote on CEO pay. But it would have been more meaningful with an analysis of the pay plans that received less than 90% of the vote, and some detail about how the pay plans have been revised to respond to shareholder concerns in order to prevent a substantial no vote.
2. This would have been more persuasive if it addressed the potential for abuse, the impact on variability, and the relationship to long-term sustainable strategic goals.
3. Same point here about the potential — and past practices — of abuse.
As we have said many times before, when stock prices and compensation are high, it doesn’t mean that the latter caused the former. Stock-based compensation has no validity unless it is indexed to the peer group or the market as a whole. We once again quote Grace Kelly’s comment to William Holden in “The Country Girl,” “When I was a kid our village had an idiot. He used to think elephant tusks came from piano keys, but he had nothing on you.”