May 15, 2009 article by Robert Kropp published in Social Funds reviewed executive compensation guidelines and policies developed by the California State Teachers Retirement System for 300 of its portfolio companies.
Grahall applauds the efforts of CalSTRS to increase pressure on public companies to enhance accountability, transparency and independence in the structure and decisions regarding executive pay. Media and public outcry will have little influence on executive compensation practices, and government regulation will be long in coming and its effectiveness dampened by the political negotiation process. In our view, institutional shareholders are best positioned to pressure boards, compensation committees and executive to make the necessary reforms.
However, we believe the CalSTRS policy falls short in one critical paragraph regarding the roles of independent consultants and management. The committee should define how it evaluates and addresses potential conflicts between the interests of both individual consultants and their firms and the interests of the company. Any potential role that management may play in executive compensation, such as the CEO’s role in recommending program design or evaluating subordinates should be explained. For example, the degree to which the committee may rely upon management recommendations in identifying specific performance metrics that may be included in the compensation should be explained. Simply stated, this is not tough enough. Should Compensation Committees rely on the advice of consultants with potential conflicts, including being under the thumb of management? We think not. Should the CEO have a direct role with the Committee in shaping executive compensation policy? We also think not.
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