I was fascinated to see the Eliot Spitzer (yes THAT Eliot Spitzer) had an article published in Slate.com but was even more interested to see that the subject was the apparent change of heart of one of the most prominently conservative federal judges, Richard Posner. Spitzer notes that “[Posner] is both the creator and the defender of the free-market theory that has guided deregulation for the past 30 years.” Further Spitzer notes that in a dissenting opinion, “Posner wrote that there is growing indications that CEO pay ‘is excessive because of the feeble incentives of the board of directors to police compensation…’”. Wow that is pretty left wing for Posner.
Clearly the relationship between boards and management is broken, or maybe I should say not broken enough. Much like the relationship between the legislative and executive branches of our government, boards are established to oversee and ensure that the management is working for the betterment of the company and its shareholders. It should be a “checks and balances relationship”. Posner points out that directors are often selected by the CEO, leading to conflicts of interest, entrenchment and bad decisions. That would be like the US president selecting and appointing senators and congressmen.
Extending the metaphore a bit more, one might liken the role of compensation consultant to that of the judiciary branch of our government. Compensation consultants are expected to be independent, thoughtful, knowledgeable and un-influenced by outside forces. Well here is another problem in many companies, not only is the board entrenched with management, but often the compensation consultant is neither independent of the company nor of the interests of his own firm.
Among the Grahall consultants we have had many “prior lives”. We have worked at most of the major consulting firms and know that survival at these places is very much a condition of cross-selling. In fact, cross-selling is an important part of any large, integrated firm’s business model but is also one that can be at odds with independence in compensation decisions and appropriate governance structures. While we believe that most compensation consultants are doing a good job, there are a few who are less effective. Does one bad apple spoil the barrel? We don’t think so, but like executive compensation, if there are perverse incentives it is likely that you will get perverse behavior.
Independence, honestly and integrity are the keys to successful relationships. You need not just expect this from your consultant and your own company; you must demand it. Contact us to learn more about our uniquely independent and honest approach to consulting. We hope you’ll find it refreshing.
Email Grahall’s OmniMedia Editor at Omnimedia@grahall.com