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Government Wants to Limit Executive Compensation
Mar 22Hold onto your hats, friends. This one’s going to be a hurricane.
The Obama administration reportedly wants to be in the executive compensation business. The scary part is laid out today in a New York Times article:
One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.
The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.
Note to government officials: Please Google “Law of Unintended Consequences Executive Compensation Increases SOX.”
Second note to government: Please define how you measure performance when you say you want corporate boards to more closely tie pay to performance.
I’m in the compensation communication business. I think I’ll be very busy this year.
About the Author
Frank Roche
Frank started IFRACTAL over 7 years ago with Sarah Chambers. Together, they've created HR communications and HR software for some of the world's leading companies. Frank is also studying Flamenco guitar and origami.
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I’m telling you Frank – this administration is creating huge new markets for us Human Resource Consultants! I don’t think that this one or the EFCA are going to be good for business, free enterprise or the country, but, they can be good for us.
The Federal government has never been successful at legislating compensation. Sox was not the only law that led to increased compensation.
People in Washington do not seem to understand how businesses actually work and I mean the ones that work well.
There is a market for executive talent just like there is for all other goods and services. It is a global market and just like any tax we levy on corporations, one consideration– though not the only one — needs to be whether we harm the global competitiveness of US based employers.
An equally large issue is that there is often not just bad regulation but often lesgislation that is too vague to be followed with little regulatory guidance. The time and effort by outside directors and senior management as well as the cost of outside consultants and lawyers in trying to comply are resources that would be better spent running a more effective and efficient company.
I am not saying that there are not many things wrong with the way highly paid people are compensated in some companies. There are also many companies doing this well. I am saying that legislation based on short term appeasement of an angry electorate through legislation is more than likely not going to solve the problem. I am saying that the solutions are to be found by having shareholders take the lead in providing better guidance to well intended outside directors and requiring as much transparency in the process as possible.
These are complex issues without a one-size-fits-all solution. Defining pay-for-performance sounds much easier than it is.