Most companies try to do the right thing when it comes to executive compensation, according to Salary.com's Bill Coleman. But even with greater scrutiny and new SEC disclosure rules, other pressures continue to push up executive pay, he said in an Aug. 12 telephone interview with Plastics News.
As senior vice president of compensation, Coleman manages teams researching and publishing data on executive pay trends for Salary.com, which develops custom software designed to help businesses make better decisions about pay and performance. He has more than 15 years' experience in consulting, compensation and benefits design, working at Watson Wyatt Worldwide and PricewaterhouseCoopers before joining Waltham, Mass.-based Salary.com. Coleman is a member of WorldatWork, a professional industry group focused on human resources, and the National Association of Stock Plan Professionals. He has a bachelor's degree in math from the Massachusetts Institute of Technology.
Q: How would you evaluate the efforts of company compensation committees?
A: Compensation committees do try to figure out how to pay people fairly and reasonably, and motivate them to achieve certain results and encourage behavior that is good for shareholders.
Q: It's been two years since the Securities and Exchange Commission implemented new disclosure rules. Have they helped temper pay for chief executive officers?
A: There is a lot more pressure on companies and boards to do more diligence, and it makes boards ask what they want to put [it] in full view of others. So you see perks trending downward. But a lot of other things in compensation didn't change that much because too much change would imply that they weren't doing things right before.
Q: Why is the additional required information not changing the approach to pay?
A: One of the weird effects is that it has created more information that can be used by the executive to obtain more compensation. When you are in the game of keeping up with the Joneses, it can create a shopping list of pay demands for CEOs to ask for. When you have access to the Joneses' bank account, you can ask for it, too.
Q: But shouldn't boards take that into account in their plans?
A: There is the tertiary effect that more information creates where boards say, ``My CEO is better and I have to pay my guy better.'' So that kind of disclosure creates this ratcheting-up type of compensation, where every CEO is paid at the top of the line which is just the opposite intent of the disclosure rules.
Q: Can you explain how that works?
A: It's simple. An executive sees a bigger laundry list. They look at how much someone else is getting [vs.] how much they are getting. They want to know why they aren't getting the same amount. A CEO focuses on his or her strengths and the weaknesses of others in negotiations, and, boom, they are the superstar. And the CEO has more business and social capital so the CEO tends to get his or her way.
Q: Where does that lead?
A: The availability of information and the rise of the CEO as an icon, movie star, celebrity, superstar has made executive pay track things like Hollywood pay, superstar pay, entertainer pay, NBA basketball pay.
Q: Is there a solution to that?
A: I don't know that executive compensation can be a zipped-up, precision-type thing. Performance metrics could be a lot tighter. But there are variable measures and it is hard to come up with reasonable goals and metrics. And economic conditions can impact their achievement, and companies don't want their executives to be encumbered.
Q: What is one of the biggest conundrums in executive compensation?
A: How to separate the market effect on results from the management effect on results is difficult.
Q: Why is that?
A: You can't assume stock goes up because of a manager, or that it goes down because of the economy or poor management. If you had stock in 1997, by that reasoning, you must have been a phenomenal manager. And conversely, you would have to assume that if you had stock in 2002, you were not a good manager. But the reality is that when the entire stock market grows over two years, it is unlikely that is because of the managers or executives.
Q: Is there a way to adapt compensation for that?
A: You would need to use some sort of relative measure to compare how you are doing vs. someone else. But there are dangers, because you could end up rewarding average or poor performance in a down year just because your poor performance was better than others.