October 15, 1992 should go down as a watershed in the annals of executive compensation. On that Thursday, the SEC changed the ball game by directing corporations to provide shareholders with easy-to-understand reports on executive compensation. It also revamped rules that placed restraints on the ability of stockholders to share information among themselves. These changes will further open executive compensation to greater scrutiny.
This roll-out of new rules comes on the heels of a long-building groundswell of disgruntlement, focusing on what many see as excessive compensation. Coverage in the media has been extensive.
Executive compensation has been, and largely remains, an arcane subject. Beyond the boardroom, there was little popular interest in the topic. But poorly designed plans, not geared to the harsh realities of the present economic landscape, set the stage for failure, criticism and change.
When news of big bucks going to some executives came rolling in upon an economy that was in deep trouble, the public reacted as anyone would have expected. Among this public, stockholders were especially up-in-arms, given disparities between corporate performance and what top executives were taking home in cash and stock.
The blow-up and ultimate SEC action was inevitable, particularly in the tinderbox climate of a political year. But this key event is not the likely end of it. The Washington political scene will be changing dramatically, and we can expect some tinkering with the tax law in the future. For the present, however, compensation practitioners need to understand that they are working in a global economic, social and political environment. Americans, shareholders and general public alike, fairly or not, are increasingly comparing our compensation practices to those of our international competitors.
We are dealing with a transition in executive compensation which is driven by 1) efforts to make U.S. enterprise competitive in world markets, and 2) changing perceptions of pay equitability and reasonableness.
The key players in all of this are: 1) stockholders - critical of the discrepancy between corporate performance and executive pay levels; 2) the public - stung by a job-eroding recession; and 3) the media - whose spotlight follows and amplifies the public interest. Underlying it all are systemic changes in the U.S. and world economies.
Consequently, concepts about fairness in pay and pay-for-performance are being retooled for use at the executive level. Strategic thinkers are working out ways to meaningfully measure corporate performance and to ground executive compensation in business strategy an long-term performance, rather than survey data, tax law, and quarterly results.
Clearly, we have our work cut out for us!