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Holding CEOs' Feet to the Fire

Article by John Prestbo March 28, 2012 //   3 minute read

There was some good news in The Wall Street Journal this week under the headline “CEO Pay Lags Behind 2011 Results.” The reason behind this news needs to be expanded and extended if we hope to return the United States economy to a strong growth track. The story reported preliminary data on CEO pay at 75 companies surveyed by the Journal and the Hay Group, a management consulting firm. A more comprehensive report on 350 companies will be out later this spring. This survey found that despite fairly significant gains in the companies’ profits (the median was up 17%) and revenue (up 9%), total direct compensation for 65 CEOs in place at least two years rose just 1.4% last year. That wasn’t the good news, though. The glad tidings were in the reason for CEO pay increases being held in check. The survey found that “corporate directors, under new scrutiny from shareholders, are tying more CEO pay to corporate performance. When companies miss targets, directors are holding the line.” Just count the blessings in those words: First, shareholders — particularly big ones like pension plans — are acquiring the backbone to take a more active role in the companies they own, rather than rubber-stamping whatever management does. Second, directors are setting specific performance targets, not just one or two but several that might include three-year earnings goals or pre-tax profit margins. Third and most important, directors are sticking to these targets instead of indulging their “discretion” to give the boss a big boost even if performance falls short. Accountability — with consequences — in the boardrooms and executive suites is absolutely essential to strong, sustained economic growth. Not only will shareowners and other stakeholders be better served, but also the cancer of clubby corporate elitism might be contained from metastasizing in the national psyche. Anger about executive pay has sometimes focused on the absolute levels of compensation (which averaged $9.4 million for CEOs in the Journal’s survey), but reasonable people understand the immense responsibilities many CEOs shoulder. Big paychecks that are undeserved, however, get everybody’s goat.