Last October, on Halloween to be precise, Carl Icahn posted an article on www.icahnreport.com that leads with “Executive pay is out of control in this country.” Well he certainly was neither the first nor the last person to make that observation. He takes direct aim at the people he believes are to blame for this problem: Compensation Consultants. His caustic observations along these lines made me realize that it might be harder to be a compensation consultant these days, than it is to be a lawyer. And it reminded me of a joke:
Q: How do you get a lawyer to smile for a picture?
A: Just say “Fees!”
Replace the word “lawyer” with “compensation consultant” and you get the general idea behind Icahn’s article.
But really how can we expect that Icahn would think otherwise. Carl Icahn’s experience with both executives and their compensation consultants comes from his background as a financier, corporate raider and private equity investor. As we know, basically what Icahn does is takes companies, sometimes troubled companies, and sometimes whether they want to be taken or not, and shakes up and shakes out management. His style is to find companies where he can make high visibility changes that appear to improve performance. Notably he is a director at Blockbuster and won that seat in 2005 after blasting Blockbuster’s CEO John Anti-oco’s management and calling his compensation package “unconscionable.” Anti-oco stepped down in 2007. Clearly the companies that Icahn has acquired or become involved with would not be a representative sample of all the public companies in the US. We whole-heartedly agree that Blockbuster’s pay package for Anti-oco was outrageous, but it seems short sighted for Icahn to measure the worth of compensation consultants based on his experience with some of the sickest companies in the world.
Our goal here is not to defend nor condemn compensation consultants. Like poor performing companies, there are consultants who lack independence and are motivated by fees to provide advice that is just exactly what management wants to hear time and time again. And sometimes it is more than just a conflicted comp consultant that causes outlandish and egregious pay situations. Sometimes it’s the company’s strategy that is off and by doing their job, the compensation consultant aligns reward to successfully execute the bad strategy. (Keep in mind that it wasn’t the compensation consultants who created business strategy.)
There is we believe a “multiplier effect”: if you start with an isolated and entrenched board, add a conflicted consultant, pile on bad analytics, throw in a weak head of Human Resources, and top it all off with an ineffective rewards strategy, you will find not just “a little pay inflation” but rather a company whose executive pay has gone totally off the reservation (think Block Buster).
Companies, the media, investors, our elected representatives, and even corporate raiders, financiers and private equity investors need to understand that the right prescription for effective executive compensation isn’t just to avoid using consultants. These compensation programs needs to be carefully structured, linked to good business strategy and implemented with care and thoughtfulness.
Contact us so we can discuss how our market-leading knowledge in areas of compensation program design and strategy, use of advanced analytical tools, and research and empirical analysis can help you create effective executive compensation strategy.
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