Excessive Executive Pay in Spotlight, But Scrutiny Fails to Change Comp Practices

There are few business activities the news media seem to delight in exposing as much as “excessive executive compensation.” But recent research shows that these types of headlines, however alarming to public and investor relations departments, don’t change how corporations actually behave.

“Most companies don’t seem to care enough to substantially change their pay practices,” says David Larcker, professor of accounting at the Stanford Graduate School of Business. “They might shift the mix of compensation a bit — from cash payments to stock options, for example — but in total compensation terms, press exposure doesn’t really seem to matter. Obviously, there are some executives who create a lot of value and you want to pay them a lot. But there are other instances when you say, ’Wow, how did this guy get paid this much money?’”

The impetus for the research came when Larcker and his colleagues were trying to understand what might help put constraints on excessive executive pay. One of the things that earlier research had highlighted was the potential role of the press as a watchdog for catching particularly egregious levels of compensation.

“Two issues emerged,” Larcker recalls. “First, is the press picking the right executives to pillory?; and second, does it make a difference?” The answer to the first question is “perhaps.” The answer to the second is a resounding “no.” Although excessive compensation is known to be a sign of poor governance, it will likely take the initiative of activist shareholders, employees and others with a more vested interest to reform excessive executive pay practices.

Article contributed by:
Joseph Daniel McCool, Senior Contributing Editor, ExecuNet
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First published in RecruitSmart Insider, ExecuNet’s biweekly market intelligence report.