Friday, January 27, 2006

Truth and Consequences

Some knowledgeable people (including Joe Nocera of the New York Times) warn that SEC improvements to compensation disclosure could, under the law of unintended consequences, make things worse. CEOs, they worry, will see exactly how much the other dudes at their club are making and insist they’re worth that much too, driving compensation to the highest common denominator.

A bit naïve, because this already happens. The consultants, accountants and lawyers who advise comp committees, not to mention well-connected board members and CEOs, already know how to get the skinny on other executives' compensation.

Clearer public disclosure shouldn't worsen the longstanding monetary grade inflation fueled by consultants' compensation surveys. If the rules help ordinary folks understand who’s really getting paid what, this will level the field between corporate advisers and the rest of us, the great unwashed. So I see little downside to letting it all hang out in the proxy.

Nocera is right that the compensation industry will figure out how to use the new rules to their clients' advantage. But no one can predict exactly how the pros will play the game.

In a groundbreaking speech last year, compensation consultant Frederic Cook called surveys “pernicious” and “the major problem in executive compensation.” (He should know: Like all consultants in his field, if he advertised on TV his slogan would be something like “Inflating Executives’ Worth Since the Late 70s.”) Naturally, when you look at his firm’s website, the first thing that jumps out at you is...well, a bunch of surveys. But he still gets brownie points for speaking out.