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Compensation Consultants Grease the Executive Pay Casino

Executive pay is out of control in this country.

CEOs of Fortune 500 companies now make about 520 times the average worker. Yale School of Management argues they make about three times more than their counterparts in Japan and more than twice as much as those in Western Europe.

This disturbing trend has gotten worse over the last few decades – a period when this country has increasingly lost its economic lead. The trend suggests that CEOs have become increasingly focused on their pay packages and not the welfare of shareholders, employees, stakeholders and our national economic well being.

A major reason executive pay packages are ballooning is because of the incestuous relationships between boards and CEOs who conspire to give lucrative pay-and-perk packages to each other. But it is also due to the egregious use of "compensation consultants" that soak up multi-million dollar fees to provide strategic counsel to boards and in addition advise ever higher pay packages to top managers they presume to oversee – whether they perform well or not.

The use of these compensation consultants, which are paid handsomely with shareholder money, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not.

According to a recent study by researchers at the University of Southern California, Executive Pay and "Independent" Compensation Consultants (2008), executive and director pay is higher at companies where consultants are hired. The study found that median CEO compensation is $1.5 million in companies not using consultants, $3.0 million in companies that purchase surveys but do not directly retain consultants, and $4.2 million in companies that retain consultants.

In addition, companies now may use multiple pay consultants from different firms to justify or legitimize pay packages that are unusually generous. A company using three or more consultants pays almost 25% more to its CEO than a company using only one consultant. Companies can bring together recommendations from multiple consultants to create a single generous package or ignore recommendations that the CEO is unhappy with. A 2007 study done for Representative Henry Waxman showed that 25 of the 113 Fortune 250 companies disclosed that they hired multiple compensation consultants in 2006.

There is a conflict of interest if a consultant provides both executive compensation advice and other services to the same company. The Waxman study concluded, "In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interests was 67% higher than the median CEO salary of the companies that did not use conflicted consultants."

"Over the period between 2002 and 2006, the Fortune 250 companies that hired consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants," the report found.

It also said that compensation consultant conflicts of interest are widespread. Over 100 large publicly traded companies hired compensation consultants with substantial conflicts of interest in 2006. The study found that in 2006, over two-thirds of the Fortune 250 companies that hired compensation consultants with conflicts of interest did not disclose the conflicts in their SEC filings. To list whether there is a conflict of interest in a SEC filing should be required. The study found that in 30 instances, the companies informed shareholders that the compensation consultants were "independent" when in fact they were being paid to provide other services to the company.

Watch this.

The use of compensation consultants is clearly growing. Of the 880 firms included in a recent study at University of Pennsylvania’s Wharton School of Business called The Role and Effect of Compensation Consultants on CEO Pay, 86% used a compensation consultant. "Little is known about the role of compensation consultants in the design of incentive schemes or how they influence executive pay levels," the researchers wrote.

The failure of a company's board of directors to take charge and adopt responsible executive compensation policies has forced more shareholders to take notice and demand tangible progress on this issue. To stop these practices we must demand change in Washington. We have to beat back dominant lobbying groups like the Business Roundtable, which protects the status quo. To fight this, we must show Congress that a large number of shareholders are fed up. Our objectives can be accomplished if you sign up for United Shareholders of America.

Comments

Assuming the study adjusted for company size as larger companies can more readily afford consultants and thus disproportionately retain consultants compared to smaller companies, the main problems on consultants are the conflicts Carl cites (leading often to flawed/manipulated peer groups) but also the ridiculous practice that everyone targets pay at 75%ile pay when obviously many are deserving 25th%ile.



Two things:

1. I'm all for paying top dollar to a champion. A champion that produces and makes their company profitable for the people that put up the money as shareholders and I do believe that those that are at the top of their game should be paid handsomely as I plan on being in that situation someday. I do have a problem paying somebody top dollar when they are not producing. Now who determines who is not producing ? It should start with the Board of Directors, and it should be seconded by the company's customers wanting to do business with the company and it should be confirmed by happy shareholders. If any of these 3 areas are unhappy, then we have a problem and the CEO should be aware of it well before it gets to that point. If the CEO does not take care of business, then yes, we need the ability as share holders to step in and fix things before too much damange is done to save the company.
2. Our nation is hurting right now with a good many companies sending their work overseas and it is directly affecting the money that is necessary to run our country. We need to bring these jobs back home and one thing that I believe will do more to benefit our economy here at home in America would be to cap the Top Executives pay at a percentage of the lowest paid employee because this will raise the average wage for hourly and salaried employees in direct proportion to upper managements pay and I believe that this will benefit our economy substantially because there will be more money spent with our retailers should this happen.

Virgil
http://www.KeepAmericaAtWork.com



WOW! My poor Grandparents, the American dream has betrayed them and become a nightmare. What have we become? Individuals using their higher education opportunity to ROB the same institution that provided a structure for their parents to send them to college. Just who do they believe they were serving or better yet who's money did they think they were stealing?!

Carl, we must correct the system that has caused harm to so many people. America of the people, by the people, for the people..



I have no issue with CEOs making top dollars if they deserve it. I was with a company that initiated a feedback system for employees throughout the company so the executives could hear directly from their global employees. One of the first comments made was by an employee who stated emphatically that our executive leadership made absolutely no difference in the performance of our company.

One was actually promoted into a leadership position and made it clear that he had no intentions to work as hard anymore as he did 15 years ago when he first joined the company.

I would love to cut or eliminate the packages of ineffective executives. Many would probably decide to leave and guess what-----That is exactly what we would love for ineffective "leaders" to do. Leave but do not take out money with you.

I have experienced a big difference between leaders that actually started a company and those who simply kissed their way to the top. The founders had pride and energy since this was their life's work. They were visible, always looking for improvement and generally very humble. "Elected" leaders often are impersonal, arrogant and saw their position as their right to be on the top, take credit for the achievements of others (In my company they actually moved the person responsible for the turnaround of their biggest business unit), but throw up their hands when they miss performance targets.

Actually, our old CEO stated several years before he finally retired that he could not influence the stock price. However, he stayed an extra two years to collect his salary and bonuses. In addition, when he could not deliver the financial numbers, he added "diversity" to his metric. He forced "diverse" people into leadership positions and set them up for failure. All that time he did not realize the if you look for the best people out there, you will have a very diverse workforce.

This is the kind of nutty stuff that is going on in a US Fortune 500 company. Performance---NO, actvities and lots of rhetoric and PR agents---YES. It is disgusting and if this country cannot get this straightened out quickly, we will no longer be competitive in the global environment.



Right On Carl!!!
Even pay for outstanding performance has to be controlled. Let us not kid ourselves....the overwhelming factor in outstanding performance are economic trends not particularly related to a particular company. For example, GE benefited from the finance game and now it is suffering.....overall it is a zero sum game.....when one looks at the very long term....neither Jack Welch or Immelt added anything that was overwhelmingly unique.....the times were right for equities and finance due to overall economic and political factors......

Of course Welch was captain of a lot better situation than Nardelli so there is some variation although the major variation is beyond the CEOs control as a rule.....unless the CEO invents a cure for cancer in his garage and gives the patent to the company.



Carl,

You're playing with fire asking the government to step in.

If you don't like a CEO's pay, just sell the stock.



Executive compensation is not about global competition, but gathering a big pile of money as quickly as possible and running.

These people are traitors to both their shareholders and the country and should be dealt with as such.



Exec. compensation has gone too far in the last few years.
Carl I appreciate all your efforts.



Technicians referring to market downturns or economic recessions as “historically” significant are in my opinion “hysterically” insignificant. Never in history even during recessions has a condition existed where individuals could purchase a home with little or no money down at substantially below prevailing interest rates. That condition allowed to exist through the efforts of President Lyndon Johnson's “Great Society” and extended through organizations like Acorn, Fannie Mae and Freddie Mac is the source of todays financial crisis. When former Fed Chairman Greenspan and former President Bill Clinton ordered the banks to reduce reserves and extend credit to homebuyers unable theretofore to qualify for mortgages, the current economic crisis was in the making. Twice bills were introduced to congress to create an oversight for Fannie Mae and Freddie Mac and twice the Democratic congress voted it down. One of the Senators introducing those bills was Senator John McCain. Could those rejections have been due to the financial “benefits” provided to certain Congressmen? At any rate there is no question in my mind that this recession will be deeper and longer than any prior recessions. The prospect of another $150 billion “economic stimulus package” proposed by Speaker of the House Pelosi is only going to allow families to either make a single mortgage payment or keep their car from the “repo man” for a month, maybe. It will not turn the economy around. The $700 billion dollar bailout is too little too late. This recession is a result of greed and fraud perpetuated on the public and there is only one reasonable solution. “Increase and extend unemployment benefits to the unemployed, which will not keep them in their “overpriced homes”, but allow them a respite to allow them to seek employment. Those with jobs seduced into believing they could own homes with little or no money down at reduced interest rates should be allowed, under a moratorium, to continue to make those low monthly payments for at least three years. That would keep home inventories at the banks somewhat reduced.” As homes are sold to “qualified” buyers out of inventory, there will eventually be demand for new homes and the recession will have bottomed out. There is no amount of Congressional rhetoric that will change that scenario. It requires time for healing.



I sold 95% off my stake in the stock market last year and have NO plans to get back in until CEO pay is under control. Boycott the scam market!



Carl, I just signed up after watching you on fast money. I am an individual investor and I am fustrated on the existing schemes in both the market and with company management. As it relates to the marketplace, the SEC is a joke as it relates to reg sho and responding to apparant fraud in the trading of finacial instruments in the marketplace. As it relates to corporate boards it is a joke that if I'm on your board you are now on mine thus there is absolutely no integrity in the corporate suite. This only puts investors at a huge disadvantage with virtually no recourse since all companies are playing the same game. Also my vote doesn't count since mutual fund companies force the agenda. i.e. Fidelity owns major positions in practically all widely held stocks and they always side with management so there is no opportunity to effect the system that has brought us to this point.



If Obama/Biden win, wouldn't Biden have a great influence on his home state of Delaware in reference to changing the compensation rules for CEOs? I certainly hope so!



Recently I got a Proxy form in the mail from my mutual fund.
Proposed:
1. To elect Directors of the (board) of the Fund.
2. "To approve a proposed Agreement and Plan of Reorganization...into a newly established Delaware statuatory trust bearing the name..."

Is this an attempt to get the fund management to Delaware in order to get themselves more compensation?



HOW DO WE GET A LIST OF THE COMPANIES USING CONFLICT COMPENSATION CONSULTANTS? I WOULD LIKE TO FIRE OFF AN EMAIL TO THEIR BOARDS AND EXPRESS MY CONCERNS AND DISPLEASURE.



Carl

I have joined. One thing people forget is that even the CEO is just an employee. The question should not be how much the CEO is worth but how much do you have to pay to replace him? Can we hire someone to do the same job cheaper? Has any board that you have been a member of, ever asked how to get the same work done from a CEO at a cheaper rate?

Darryl Pierce



My sincere thanks go out to you for initiating this effort to correct what I have seen as the most corrupt form of stealing from company shareholders in recent history.

Obscene Wage disparity between CEOs and average workers have created an unstable social environment that will only get worse unless corrected.

With a new administration coming into the White House now is indeed the time to act.



I agree with the gentleman that said, "You're playing with fire asking the government to step in." But I did not see anything to suggest that Carl is supporting government intervention simply because he referenced a Congressional hearing and study to further substantiate his assertions. (Carl, please clarify.)

I am not particularly fond of some measures that Congressman Waxman supports but I am not of the opinion that every word that comes from someone I would not vote for is not worth hearing and considering.

If one looks at the tiny number of views of Carl's referenced link one can see that the average citizen or shareholder doesn't seem very interested or concerned about executive pay or they just aren't being reached. If that remains the case, it is quite likely that a (possible) one-party government will feel free to do whatever they want on this issue. People should also view Mr. Mozilo's defense of his pay on youtube and then research more on his compensation to see with whom they agree.

Carl, here's hoping you can light a bigger fire and do so quickly.

With respect to all,
Ray
Alpharetta, GA



The bizarre logic of CEO compensation game came to the point that it is not only the boards of public companies but also the buyout firms think that by shoving multiple millions at CEOs they align the interest of owners with those of CEOs, as of Principals with Agents.

Nobody seems to realize that, because the absolute bulk of value in any firm is produced by lowly (and wily) front-line employees, not the guys in corner offices, the boards are essentially aligning the interests of Principals with mere intermediaries (C-level managers, etc) and not Agents themselves.

The saddest detail: the Agents (employees) would work better virtually for free, if only these overpaid bosos weren't there to beat them over their heads "to drive the value up."

"Most of what we call management consists of making it difficult for people to get their work done" - Peter Drucker

PEHub.com posted recently compensation numbers of some of the top-earning CEOs of various buyout portfolio companies. Allow me to share here my reply to it. It might be interesting to your readers as well.

If only limited partners of buyout firms realized that LBO general partners (GPs) so horribly overpay the CEOs in order to under-deliver... We'd see GPs hanging from every light pole around Delaware's Court of Chancery.

The fact is the usual hands-on, hyper-involved CEO (seemingly the most desirable type for buyout guys) leaves unrealized between 15 to 50 percent of potential productivity/profitability growth of a portfolio company. Multiply this wasted profit potential by the financial leverage effect, and Blackstone and countless others leave on the floor enormous amounts of money that should be lining up limited partner's pockets instead.

Will LBO guys ever learn that relying on smart people at the top instead of relying on smart systems that harvest wisdom and entrepreneurial energy of employees at the bottom is a truly wasteful habit? After all, most of the value in any portfolio company is produced by those darn employees, not the guys in corner offices...

Look, no one is as smart as everyone and you just don't know what you don't know. Yet, the usual "take charge" CEO can't help himself but try to outsmart thousands of employees who otherwise could voluntarily come up with things he'd never thought possible. After all, employees know in which nooks and crannies the savings and potential profits are hidden (I am speaking from experience on both sides: as a manager and a subordinate.)

Since outthinking all employees can't possibly work, the geniuses in charge inevitably bring out the whip and that inevitably makes things much worse: employees do only what they're forced to do, not a pinch more. Exactly a year ago BusinessWeek had a centerpiece profiling several CEOs employed by LBO firms, including Jeff Clarke of Travelport who is shown here to grab a cool $42 million in one year. Although the article itself was not openly derisive, its online version contained an audio interview with the author who giggled nervously as she described the "lashes and more lashes" performance-improvement strategies of the CEOs she profiled for the magazine.

Imagine what you’d do if you were the hired subject of these modern-day slave drivers. You would do the very minimum required to avoid the beating while holding the middle finger in your pocket firmly extended... wouldn't you?

Carl Icahn calls CEO of publicly-traded companies many derisive names, most of which fit. Am I the only one who sees that many CEOs hired by buyout firms aren't any better and, in fact, might be worse? Since my firm designs systems that harvest the entire employee potential, I know that there are many prototypes of management systems out there that can be installed even by Joe the Plumber with IQ 100. Yes, almost any Joe the CEO can produce EBITDA growth as fast and certainly way cheaper than these hand-selected "geniuses" who only depress employees' willingness to work.

Now, could anyone with first-hand knowledge explain to me why buyout GPs pay millions to these miserable money wasters? Please feel free to actually enlighten me: [email protected]

The link to original is here:
http://www.pehub.com/22036/2009-compensation-report-pe-pay-somehow-increased-despite-dearth-of-exits/#comment-19251



Our public traded company system is fundamentally flawed. The board members all belong to the same club as that of CEOs. They are CEOs friends and give whatever the CEOs wants. They get paid handsomely for four meetings a year. They don't care about shareholders. It is not their money. Many CEOs even go out of their way to make sure that whoever wants to represent the shareholders is not on the board.

Until we fix the corporate boards, we are not going to resolve any issue related to outsized CEOs pay and other corporate governance.



You are to be commended for challenging the ridiculous, self-serving way that Corporate management feather their own nests at the expense of the shareholders. Boards of Directors are usually drawn from Managers of other Corporations, who have benefited from similar practices in their own Corporations, and have lost sight of the fact that they are supposed to be fiduciaries to protect the rights and interests of ownership.



Carl,

I truly applaud your efforts to tackle this issue. I believe this is a primary cause of our deteriorating economy and position in the world. This is long overdo. This issue was first brought to my attention around 1982. I recall as a young engineer starting my career in the early 1980s that our government was complaining to Japan about unfair trade practices because of their dominance in our consumer markets. Japan's response was that they believed the true issue was that US companies were not competitive because executive compensation was about 160 times that of the average worker, compared to about 16 times in Japan. That was in 1982 and it has only gotten worse since then if we are now in the vicinity of 520 times. To pay for these packages, US companies lay-off workers and diminish re-investment which weakens our companies and the overall US economy. Imagine if the US auto manufacturers funneled more revenue into design and development rather than excessive pay packages. They might have actually have been able to compete with companies like Toyota.

Godspeed to you in your efforts to reign this in. Gaining shareholder say on compensation is the only way to stop this ridiculousness.



Mr. Icahn with all due respect If I were in your position of power I would take a whole new approach with regards to corporate compensation. Instead of trying to get regulation for pay caps which is technically another attempt of the continuance of corporate welfarism, I would take a new bold approach to the issue.

Since all of the elites are so gung ho about free world trade which in a short few decades will likely fail given the ramifications of high costs from peak oil coupled with the likelihood of strengthening currencies of producing nations and weakening currencies of debtor nations, I would be looking it at an angle that would make their position of CEO power in the USA obsolete.

By outsourcing CEO positions to a party in a third world country that has an excellent education system would solve the issue and would exhibit competition at its highest level.

Unfortunately, I think you are a sheep in wolves clothing who really wants to keep the status quo of CEO power in America because you have the foresight that by throwing a few crumbs in compensation you can protect the institution of CEO power when it really should subject to the same ravages of competition the workforce have been under for decades.




Certainly partly to blame are the institutional and pension fund buyers who have the research ability to know who is not achieving and who is being overpaid. They have the power to not buy the stocks of companies with overpaid executives and to vote millions of shares against directors who aren't looking out for the shareholder. Of course they won't because these folks also are grossly overpaid and their outfits also hire the same compensation consultants.



Its not just the compensation culture that's a problem, it's the whole idea that you can switch CEO's from one industry to another with the mistaken belief that CEO's don't need to have a greater understanding of the business than anyone else in the company. Next move is to hire a consultant to advise the CEO on how to cut costs.



While we're admiring these guys for their pay packages, could we maybe pay attention to fixing a broken wheel in the capitalist system we all know and love?

Repair the boardroom. Control shifted in the past 30 years, and now due diligence and oversight are out the window.
.
.

http://pacificgatepost.blogspot.com/2008/03/boardrooms-need-restructuring-and-not.html

The sooner repairs start, the better.



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