By Jim Barrall, Partner, Latham & Watkins LLP
It was my special privilege and pleasure to serve as the moderator of The Conference Board Governance Center-sponsored debate between Charles Elson and Craig Ferrere of the John L. Weinberg Center for Corporate Governance at the University of Delaware, in one corner, and Ira Kay of Pay Governance LLC, in the other corner, on the subject of executive pay in the USA, held on January 18, 2013.
Simply put, this 90 minute exchange is the single best discussion on the subject of the causes and effects of peer group benchmarking, and on the subject of CEO pay in general, that I have ever heard in my many years of working in the executive pay and governance arena.
The catalyst for this friendly but intense debate was Charles and Craig’s paper, “Executive Superstars, Peer Groups and Overcompensation: Cause, Effect and Solution,” which argues that:
- Peer group benchmarking of CEO pay is not justified by market forces based on data which shows that over many years relatively few CEOs quit to take other CEO jobs
- There is little CEO mobility because CEO skills generally are not transferable
- Benchmarking CEO pay ratchets it up and has been the prime cause of its inexorable rise since World War II (punctuated only occasionally when stock market bubbles burst)
- Companies and investors would be better served by benchmarking CEO pay internally to that of other officers and
- Internal executive pay benchmarking is attracting support from investors and will become more influential.
In response, Ira argued that:
- Charles and Craig were misinterpreting the data on CEO turnover
- CEOs do not move much between companies because companies have done a good job of handcuffing them with unvested equity and pension benefits
- The movement of CEO pay should not be evaluated based on pay opportunities (as Charles and Craig have done) but rather on realizable pay
- Benchmarking CEO pay at the median of the peer group is appropriate and good
- For most companies peer group benchmarks are only one factor in, and not the main determinant of, CEO pay and
- Investors support evaluating CEO pay against that of market peers, and investors have endorsed the use of peer groups and supported company executive pay plans and policies as indicated by the 98% pass rate for say-on-pay votes in 2011 and 2012.
Ira’s arguments are set forth in full in his recently published book, Executive Pay at a Turning Point.
Over the course of 90 fast-paced minutes these very able thought leaders provided valuable data and insights on CEO and executive pay practices and influences historically, argued strenuously as to where we are today in the age of say-on-pay, and made well-considered suggestions and predictions as to how pay practices should and will continue to evolve over the next ten years.
Anyone who is in any way involved in designing or evaluating executive pay plans and practices should watch the video debate, take notes and then reflect on what Charles, Craig, and Ira have said. If I chaired a Compensation Committee, I would make it mandatory viewing for the committee, and would ask the company to note it as a best 2013 practice in the next CD&A.
The video or the debate is here: http://www.conferenceboard.org/directorroundtables/peergroups.
About the guest blogger:
James D. C. Barrall is a partner in the Los Angeles office of Latham & Watkins LLP and is the Global Co-Chair of the firm’s Benefits and Compensation Practice. Mr. Barrall specializes in executive compensation, corporate governance, employee benefits and compensation related disclosure and regulatory matters.He is regularly interviewed and quoted by such publications as the Wall Street Journal, Agenda, The Conference Board, BloombergLaw, Compliance Week and Corporate Secretary.
Mr. Barrall is a frequent author, contributing editor and lecturer on executive compensation, corporate governance, disclosure and other regulatory matters. He is a co-author of the chapter on extensions of credit to directors and officers in the American Bar Association’s Practitioner’s Guide to the Sarbanes-Oxley Act.
Mr. Barrall is a member of the Board of Advisors of the UCLA School of Law and Founding Chair of the UCLA Law Firm Challenge. Mr. Barrall has lectured at the UCLA Law School, the UCLA Anderson School of Management and the Aresty Institute of Executive Education at the Wharton School, University of Pennsylvania.