What's Wrong with Executive Compensation?

7/12/13

In conversations with a few CHROs and thought leaders like Charlie Tharp, I tend to hear about frustrations created by proxy advisory firms like Institutional Shareholder Services (ISS) or Glass-Lewis. It would be easy to attribute their complaints to idiosyncratic situations that created a negative attitude in their individual cases. However, in the 2013 HR@Moore Survey of Chief HR Officers, I found that that such an attitude is pervasive, not idiosyncratic.

We asked respondents the following question: "What is your greatest frustration with regard to the executive compensation system?" I expected to see a broad set of concerns...but I was wrong. Clearly the greatest frustration stems from proxy advisory firms. Of the over 100 individuals who answered this question (it was open-ended) more than half either directly or indirectly cited the pressure exerted by proxy advisory firms. Just a sampling of the comments can be seen below:

"The role of the proxy advisors. If they were representing the interests of shareholders through some legitimate means, it would be more acceptable. The activism and social agenda they display is appalling."

"I'm not sure what is meant by the word "system." I have no frustrations with our current compensation design and programs, or with the role and relationship between Management and the Board on pay issues. However, I (and the CEO and Board) have a high degree of frustration with the influence and motivations of the proxy advisory firms - and ISS in particular. We do not believe ISS takes the appropriate time to understand a company's business when making their recommendations. As a result, we believe ISS takes a "one size fits all" approach to compensation issues and has no appreciation for necessary linkage between talent management, succession and compensation."

"The ISS organization and their staffs are not qualified to assess the actual business landscape and challenges an organization has. Therefore, their assessment of what is an appropriate plan design or metrics is imbalanced and inexperienced. They have an influence level that may not be in the best interest of business."

"You can be great on absolute pay but lower on relative pay according to ISS and create higher risk on CEO pay, which may not always be the true sign of pay for performance."

"The inappropriate influence of ISS (and some shareholders who blindly follow them), particularly in light of ISS's inconsistent, unclear, arbitrary and non-fact based standards."

"My greatest frustration is the degree to which outside groups like ISS is influencing compensation strategy. An example is that ISS doesn't think stock options are performance oriented. I cannot for the life of me figure out why ISS believes that. So, we are looking at changing our compensation program to accommodate ISS's view of the world."

"Dealing with ISS and Glass Lewis."

"Influence of proxy advisory firms, they often lack knowledge of their own policies and practices, and the lack of transparency of their processes"

"The cautiousness and concern of the committee to external group scrutiny."

While these proxy advisory firms serve a purpose, it seems that CHROs do not perceive them as fulfilling their purpose in an effective way, if effective is defined as protecting shareholder interests.