More on Corporate Governance: Executive Compensation Continues to Rise

The Wall Street Journal recently used the occasion of Pfizer's annual meeting to run yet another piece about exorbitant CEO compensation packages. Carol Hymowitz wrote a very nice piece detailing the realities of this problem.

When asked to defend Pfizer CEO Hank McKinnell's compensation, Dana Mead, head of the board's compsenation committee, did so by saying, '....Mr. McKinnell's pay was based on market forces and reflected his responsibility overseeing 110,000 employees."

The article notes that "disgruntled shareholders even tried to unseat Mr. Mead and another director this past April but failed."

What is irksome to me is that Mr. Mead didn't say something like, "Mr. McKinnell has the responsibility to earn above-average total returns for you shareholders. In hopes of attracting talented leaders to be our company's CEO, and make that happen, we need to offer a competitive compensation package. If Mr. McKinnell proves unable to meet this responsibility, he will be replaced with someone in whom we, your board members, feel is better-equipped to carry out this responsibility."

Ms. Hymowitz quotes Lucian Bebchuk, a Harvard University law professor, who notes that the board is beholden to the CEO for their membership and, thus, pretty much have to repay him/her with bloated compensation packages, and that "they don't have an incentive to change those arrangements."

Well, that really says it all, doesn't it? You have a board charged with CEO oversight, but who nominates the board? The CEO. Wonderful! I guess having no board is marginally more corrupt, but, judging by modern CEO compensation and corporate total return performances, not by much.

Though the article closes with comments on the competition for good CEOs as the reason for excessive compensation packages, I have my doubts about that. Look at corporate performance, and you'll see that very few CEOs seem to be able to achieve consistently superior returns for their shareholders. It should be fairly easy to design a CEO compensation package with the predominant proportion of it structured as variable, and payable upon attainment of consistently superior returns for the shareholders. That way, shareholders only pay for the performance. As I have written elsewhere on this blog, why would you want a CEO who doesn't think s/he can do this in the first place?