Executive pay and Opinion and Editorials

EDITORIAL: Executive pay policies, not salaries, need reform

May 29, 2010

Comparing compensation, executive or otherwise, is rarely a satisfying exercise. IBJ has been tracking pay among Indiana public company executives for years, and in good times and bad, the conclusion is always the same: Executive pay is out of whack relative to most wage-earners, but, for competitive reasons, the salty amounts are justified.

This year was no different. Our analysis of 2009 executive pay that ran in last week’s paper, and is available here, showed precious little suffering among public-company executives in spite of the worst economic crisis since the Great Depression.

More than half saw their pay fall, but only 10 saw cuts of more than $1 million. And for almost every one of those who suffered a pay cut, one of their peers saw a pay increase. Some of them, 17 to be precise, saw their compensation increase more than $1 million.

Are the amounts too high? Yes. As one observer told our reporter, “A person can live a pretty nice life on $200,000 a year.”

But some perspective is in order.

The packages on our list range from more than $16 million a year to just more than $800,000 a year. Those are big numbers, but they’re not out of line compared to the paychecks drawn by many professional athletes, whose salaries routinely exceed $10 million and whose performance doesn’t affect thousands of jobs and untold numbers of investment portfolios.

Executives make what they make because that’s what the market will bear and that’s what competition for talent demands.

Regardless, in the wake of a recession blamed largely on Wall Street, boards need to act. But reducing executive pay shouldn’t be their primary objective. Smaller compensation packages should merely be the byproduct of a broader goal: sending the right message to employees, shareholders and the market at large about cost-efficiency and fairness.

Steps such as separating the role of chairman and CEO are a good first step. When the CEO runs meetings, the board is less likely to make tough decisions about compensation.

There are other issues with CEO involvement in pay decisions. At Eli Lilly and Co.’s annual meeting this year, one proposal would have prevented current or former public-company CEOs from serving on Lilly’s compensation committee. Proponents of the measure, which was rejected, said CEOs can’t be objective in determining pay because CEO compensation is often based on what peers earn.

Those are valid points that should be taken seriously. If company boards don’t address such issues, others will. Financial-reform legislation pending in Congress includes provisions that would restrict compensation-committee membership to independent directors. It also would give shareholders an advisory vote on executive pay.

We don’t disagree with those measures, but we’d prefer that companies themselves, not government, take steps to make sure pay is fair. We agree that pay has to be competitive. But the method for determining it must also be above reproach.•

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To comment on this editorial, write to ibjedit@ibj.com.

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