Inside the Boardroom

Executive Pay:
Help Wanted
David W. Anderson, PhD, ICD.D
The Anderson Governance Group

Getting executive compensation To understand Director and investor perspectives

“right” is among the toughest
challenges for Boards of Directors
today.1 For years2, in meeting after
meeting with my Board clients,
Directors have expressed angst over
executive pay more than any other
issue: executives want more and owners want them
to have less. Stuck in the middle, Directors labour
thanklessly to attract and retain the right team of
executives and to incent them to perform in the
interest of shareholders.
The external pressure facing Directors today is great:
investors, politicians, media and the public express a
strong and near unanimous view that high levels of
executive pay are unfair – and proof that Directors
are failing in their duty to manage executives and
resources wisely. To these stakeholders – particularly
the public, whose support for our capitalist system is
crucial – excessive executive pay has become a signal
that greed, largesse and corruption get rewarded at
the top of the hierarchy. Business leaders, it seems,
work under a different set of more favourable rules
than workers.
Media coverage of the issue reinforces the general
perception that executive pay is excessive; executives
get paid large sums irrespective of performance,
in good times and bad. Given these stories are the
outcomes of Board decisions, members of the public
might well conclude that paying huge sums to
executives is pretty much all that Boards of Directors do.
better, McKinsey & Company and The Anderson
Governance Group undertook collaborative
governance research.3 We found
that 98 percent of Directors
believe Boards themselves hold
the highest level responsibility
for setting and evaluating
CEO pay and 26 percent of
Directors felt that CEOs
shared in that
responsibility.
Only 2 percent
of Directors felt
it appropriate
for institutional
investors to
share in the responsibility for
pay decisions. Institutional
investors concurred with Directors that Boards,
CEOs and investors share responsibility for pay in
these proportions. However, we discovered massive
differences in the perceptions of Directors and
institutional investors on the fairness of CEO pay: 88
percent of Directors believe CEO pay is about right
(only 4 percent say it is too high) and 82 percent of
Directors believe CEO pensions are about right (3
percent say it is too high). This is in marked contrast to
73 percent of investors who say CEO pay is too high
(20 percent say it is about right) and 100 percent of
investors who say CEO pensions are too high. While
investors agree Directors are responsible for pay
decisions, they disagree with Directors on the fairness
of the outcomes their choices produce.

1 To view a TV debate on executive compensation by North American experts , go to www.tvo.org (under “video”, select “TVO Playlists”,
“The Agenda” and scroll to “Executive Compensation” dated January 7, 2009 (tag: business)). For further reading, see: Anderson, D.W.
(2007). Getting executive pay right: Paying executives fairly will pay dividends to directors. ICD Director, 31 (Jun), 31-34.
2 The apparent excesses of CEO pay is a perennial issue; in the aftermath of the corporate scandals earlier this decade, interest in
executive pay and its role in corruption was particularly high among stakeholders – as it is again now. Five years ago (January, 2004), I
wrote an invited column on executive pay for the Vancouver Sun, the text of which is archived on my website, www.taggra.com, under
“Our Thinking”.
3 Anderson, D.W., Maly, J., and Melanson, S.J. (2008). Directors, executives and investors are refashioning governance: Practical research
tracks governance evolution. ICD Director, 138 (Jun), 28-32.
Anderson, D.W., Melanson, S.J., and Maly, J. (2007). The evolution of corporate governance: Power redistribution brings boards to life.
Corporate Governance: An International Review, 5, 780-797.

Issue 142 | February 2009 | 31

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To learn more, we interviewed stakeholders. While
many Directors think executive pay is fair from a
market perspective (the consequence of contracts),
they nonetheless expressed exasperation at their
inability to bring pay down, as investors would
like, for fear of first-mover disadvantage. Of note,
retired executives who were not beneficiaries of the
rapid rise in pay of the last 15 years believe current
executives are overpaid and express concern about
the perceived unfairness in society at large.
In an era in which public money is being used to prop
up private enterprises, the sense of injustice over pay
decisions has produced a predictable consequence:
politicians are now willing to set limits on pay when
taxpayers’ dollars are at stake. So clear is the message
that even some executives – like Goldman Sachs
CEO Blankfein and his top executive team – have
volunteered to forgo bonuses for 2008. Despite
years of warnings from politicians and Director
associations4 for Directors to reform their own
decision-making, the unprecedented tumult of the
financial crisis may turn the tide.
To help Directors get beyond the hype of executive
pay, this article will explore three questions:
1. What does fair pay mean?
2. Is executive pay fair?
3. How can pay decisions be improved?
1. What does fair pay mean?
Everyone has an opinion on executive pay. But what
is it based on? A gut response is not invalid and may
convey useful information, but on its own makes
convergent dialogue difficult. In all decision-making,
articulating criteria helps. So what are the criteria for
deciding if pay is fair?
Directors need to confirm their own criteria to
have a hope of making fair pay decisions and
communicating clearly their thinking to investors and
other stakeholders. As a starting point, here are three
criteria for deciding if pay is fair:
4 In 2004, the National Association of Corporate Directors published a Blue Ribbon Commission Report on Executive Compensation
(for which I was a Special Advisor); in 2007, the Institute of Corporate Directors published the Blue Ribbon Commission Report on the
Governance of Executive Compensation in Canada.
5 Or more precisely, there would be a cascading relationship among performance expected in light of corporate strategy, performance
objectives documented in executives goals, performance delivered, performance reported, performance validly assessed, and finally,
pay allotted.
32 | Institute of Corporate Directors
Market: Does pay reflect the market price to
acquire, retain and incent talent?
Making pay decisions that are consistent
with the expected outcomes of a functioning
market is the basis on which our economic
system is predicated, and thus provides the
basic context for this transaction.
Contingency: Is pay related meaningfully to
performance?
Pay must be earned. Evidence of such would
be a contingent relationship between the
performance observed and pay provided.5
Making pay decisions consistent with
established performance criteria – and thus
establishing cause and effect in the minds of
executives – is essential to the definition of
performance contingency in “incentive” pay.
Reasonableness: Is aggregate pay consistent
with the overall integrity of the corporation?
Assuming that market forces and
performance contingency are reflected in
pay decisions, aggregate pay over time still
needs to be seen as reasonable in its own
right, as judged by broader effects that
may impinge upon the effectiveness of the
corporation and its interests. Some argue
this premise does not make sense, as the
combined pay outcome of the market and
contingency criteria requires no further
inquiry; others counter (paraphrasing Lenin)
that quantity has a quality all of its own, and
thus may be assessed in a final “sniff test”
to ensure a reasonable decision, all things
considered. This implies factors beyond the
market and strict performance contingency
are valid, or that the market and contingent
judgments are themselves imperfect.
2. Is executive pay fair?
Every Director should use the three criteria above
– or any other set deemed able to yield a defensible
judgment in the eyes of owners – to assess the fairness
of executive pay. As investors and other stakeholders
are certainly doing so, Directors will find it helpful to
think about these criteria from various perspectives.6
To help, I will layout the arguments for and against
the fairness of executive pay in relation to these three
criteria, as I have observed them being made.
Yes, executive pay is fair
In discussions with Directors, investors and executives,
those who argue that executive pay is fair tend to
emphasize the market criterion as justification.
Market:
In the market for executive talent, supply is rare and
demand is almost unquenchable. Given these market
characteristics, the only plausible outcome is high
pay relative to most others. It is fair by definition,
regardless of the dollar amount at which demand and
supply are found to be in equilibrium.
On the supply side, this talent is so rare because of the
extraordinary combination required of experience,
knowledge, skills, judgment, character, willingness,
motivation, stamina, and self-sacrifice. On the
demand side, companies must seek every advantage
in a competitive environment; the marginal return
on rare talent increases with company size, meaning
the large companies who can afford it will be willing
to pay the highest amount to deliver maximum value
to owners. In this context, self-interested talented
executives and self-interested corporations will
bargain for pay.
Those most strongly in support of a market
justification of fairness point out that the question
of fairness itself is not relevant (and indeed may be
counterproductive), as it invites personal jealousy
to be shown. Only the bargaining process needs to
be fair in a free market. Once this market criterion is
satisfied, no further examination is necessary.
Those who argue the general case of market
fairness in pay agree that bargaining processes
are not universally well designed, and they
acknowledge poor bargaining by Boards results in
pay outcomes that are too high (though they may
not label this as “unfair”).
6 To get an historical perspective on executive pay, Carola Frydman (MIT Sloan School of Management and National Bureau of
Economic Research) and Raven Saks (Federal Reserve Board) conducted an analysis of pay from 1936-2005. Their paper may be found
at: http://web.mit.edu/frydman/www/trends_frydmansaks_0808.pdf.
Contingency:
Value creation is at the core of free market thinking.
Contingent pay based on performance that has
created value is desirable, insofar as it encourages
further performance. The fact that one can cite
examples of executives leading companies through
wealth-destroying periods while still reaping huge
pay outcomes seems a challenge to the free market
advocates’ fair pay verdict. However, the problem here
lies in the terms agreed to by the Board specifying
pay requirements (either in the negotiation to
acquire the talent or in setting goals). However, if
such contingency has been bargained away (or not
bargained for at all) in the pursuit of talent, this still
reflects the truth of the market and does not render
the outcome unfair. Thus, this unfortunate and too
frequent reality is not a market flaw per se; it is a
result of a weak bargaining position or poor business
judgment on the part of the Board.
Reasonableness:
Reasonableness, like contingency, should emerge as
a quality of market driven dynamics in the hands of
executives and Boards in their negotiating process. No
extra reasonableness test is required, once the verdict
of the free market is reached.
No, executive pay is not fair
Those who argue that executive pay is not fair (i.e., is
too high), cite a universe of reasons, which I will group
according to the same criteria.
Market:
The market (in this case, a spot market) does not
function “perfectly”, due to serious constraints that
shift the relative power advantage to executives.
These constraints include:
Information: vast knowledge asymmetries
between the CEO and the Board and
between external candidates and the Board
can be exploited;
Competition: timing (CEOs often leave on
their own terms), access to internal supply
(CEOs influence Directors’ exposure to
and perceptions of internal candidates),
availability of external supply (there is
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limited number of brand name CEOs and
perceptions of scarcity are driven by the
parameters defining the ideal candidate as
having CEO experience); and
Duress: Boards can feel as if they are being
“held hostage”, as the machinery of the
company is in the hands of the CEO with
whom they are bargaining for pay.
These constraints distort the perception of supply
and demand, making good decision-making by
Directors difficult. Compounding this problem are
flaws within typical Board bargaining and assessment
processes, not the least of which is a tradition of not
negotiating with or assessing the CEO in any rigorous
way. Other flaws affecting pay decisions include the
use of inappropriate company comparator groups
(usually for aspirational purposes); complex pay
plans and contingencies that Directors themselves
do not understand, thus having to rely on executives
to advise on their own pay; an emphasis on share
price as the arbiter of performance; commitment
to a candidate before negotiating financial terms;
and weaknesses in the Boards themselves as
bargaining and assessment agents (e.g., Directors
not being educated in the language of pay plans;
limited time to devote to complex pay decisions;
diffused responsibility across several Directors for
pay outcomes; the need to maintain good relations
with the executives; the dual role of the Board as both
coach and judge; and the relative wealth of Directors
themselves). All of these factors reduce the power of
the Board as a bargaining partner and the quality of
its judgments.
While the market may be “free”, meaning an absence
of force in concluding agreements, these serious
constraints on the efficient functioning of the
executive talent market hamper the bargaining
process and systematically bias negotiated results in
favour of executives.
A functioning free market is supposed to lead to
the efficient allocation of resources in the economy.
In this argument, an inefficient market arising from
imperfections in the Board’s decision-making process
leads to a misallocation of resources toward executive
pay, as judged by the owners of capital.
34 | Institute of Corporate Directors
Contingency:
Even if one grants there is a functioning free market
that fairly decides pay during a selection process,
a further question of value creation in relation to
incentive pay must be addressed. In the first instance,
incentive pay that is guaranteed is not incentive pay
at all. Secondly, when pay is not consistently related to
performance, it fails the fairness test of performance
contingency. Executive pay, particularly options, can
often feel like a lottery for many executives; whether
executives make money or not from the options is
unconnected to their behaviour. With complex rules,
executives are not clear what they can do to affect the
eventual payout. Under this scenario, cost is incurred
to create an “incentive” with no motivational power
to direct behaviour and no sense of earned reward
when pay comes. Thus, such transfers of wealth are
not justified on economic grounds, and may lead to
greater cost in the future when trying to incent new
behaviour, as executives become habituated to higher
pay and therefore expect and require more to “incent”
their behaviour.
More troubling is the effect on those executives who
can directly influence the reporting of performance
metrics to which pay is tied. The “results” may be
artificially created to justify the reward.
Of note, when executives who are otherwise entitled
to pay choose to decline it, they do so explicitly
acknowledging poor performance as the reason, and
with it, the lack of fairness should they take the pay. To
accept such pay would be inconsistent with their use
of the contingency argument so often used to justify
high pay when performance was good. Although rare,
this example confirms that a judgment of fairness
can exist beyond the confines of a contract otherwise
fairly bargained in a free market.
Reasonableness:
Those who deem executive pay unfair by violating
reasonableness cite a variety of reasons, all of which
judge pay in light of the larger effect it has, beyond
its fairness as judged by market or contingency logic.
Some people position reasonableness in a moral
framework and argue that business ought to proceed
from a moral centre to allow for global judgments
that capture the full effect of compensation decisions,
some of which escape the attention of narrower
economic models.
From a business perspective, the fairness of high
pay may be judged against its opportunity cost.
As a motivator, pay offers a decreasing marginal
benefit. Investors assert that executive pay is not
reasonable as it represents poor capital allocation
of a scarce resource within and across firms; owners’
capital could be put to greater productive purposes
if deployed in the business and allowed to return
greater rewards to owners.
From a leadership perspective, setting unusually high
pay for executives provides a bad example, exalting
personal gain above common goals. Executives who
insist on greatly differentiating themselves with high
pay may show similar immodesty and arrogance
in their leadership role, fostering an unhealthy
culture and impeding trust. High pay degrades the
motivation of others, as the stark pay imbalance
implies their contribution to the organization is
vastly less meaningful than the few on top. Peter
Drucker famously argued that executive pay should
not exceed a multiple of 20-25 times the average
pay within an organization7 to avoid this effect on
morale. Even if pay reflects external market realities,
the internal inequity of pay not reflecting actual value
creation within the firm is harmful.
From a governance oversight perspective, high pay
distorts executive judgment. It motivates two forms of
self-serving behaviour: (1) “too much of a good thing”
–boosting the short-term share price for financial
gain, precisely as intended by the performance
contingency; and (2) fraudulent activities – gaming
the system or engaging in illegal acts to produce a
windfall. In the first case, even when performance
contingency works, the effect can run counter to
the corporation’s long-term interests. Such are the
unintended consequences of high pay, highlighting
the need to judge fairness by various criteria.
High pay can be unreasonable when it distorts the
judgment of the Board itself. Paying top dollar for
talent creates decision commitment toward the CEO
on the part of Directors. This biases their judgment
and weakens their bargaining position, making it
7 Peter Drucker argued for a 25 times cap in 1977 and a 20 times cap in 1984, as cited in Wartzman, R. (2005). Put a cap on CEO pay.
Business Week, September 12, 2008 available at: http://www.businessweek.com/managing/content/sep2008/ca20080912_186533.htm.
more likely performance will be rated favourably and
future demands granted.
3. How can pay decisions be improved?
Whether one believes pay is fair or not, there is no
disagreement that the process by which Directors
make pay decisions can and should be improved.
Pay works as a powerful motivator of human
behaviour – with both intended and unintended
consequences. Directors must use this power with
wisdom, care and precision.
There is little doubt that the lure of large payouts
offered by equity compensation has focused the
attention of executives and contributed to the surge
in productivity and stock appreciation in the last
20 years. Almost certainly, too, the single-minded
pursuit of this wealth has misaligned personal and
professional interests, even causing the two to be
confused. Two examples: (1) the accounting scandals
of early in this decade that led investigators to the
audit committee, but the motivational cause would
be found in the compensation committee; and (2)
the current financial turmoil has its roots in pay for
short-term performance disconnected from the risks
thus created.
Boards bear responsibility for the behaviour and
performance pay yields. Whether one wants to
make pay fair through modulating the magnitude
or performance pay (hence reducing its judgment-
distorting effects), or simply wants to make the
pay decision-making process better, here are 10
suggestions as to how Directors can do so with
consideration for the long term value of their
owners’ capital:
1. Articulate a fair pay philosophy with input from
investors.
a. Devise a pay philosophy that clearly
establishes the purpose, principles and
criteria of fairness, as well as the metrics,
magnitude, contingencies and intended
performance consequences of pay.
Distinguish among the various uses of pay
(e.g., attracting, incenting, rewarding and
retaining talent) and the appropriate means
to achieve them (e.g., salary, short and long
Issue 142 | February 2009 | 35
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term incentives, performance and holding
criteria for vesting and sale).
b. Decide on the forms of pay to be used
as tools, including equity (if any) and
percentage of total stock that will be set
aside for performance incentives. Consider
who can affect the desired business
performance and apportion relative
allocations of equity consistent with one’s
ability to shape performance.
c. Talk to stakeholders – particularly investors8
– to understand their views on pay. Discuss
pay philosophy and intent, including fairness
criteria. Clarifying perspectives, methodology
and language will decrease the likelihood
of disagreement and misunderstanding.
Building trust with investors must be a key
aim for Directors.
2. Use pay efficiently to allocate scare capital in
line with the corporate strategy and risk profile.
a. Calibrate the magnitude of pay to shape
constructive behaviour and not distort
judgment. While Directors must not be
penny-wise and pound foolish, they must
recognize that too much pay is not only
wasteful, but may be destructive. Holding
too much of one’s personal wealth in
company equity is risky and can cloud one’s
decision-making.
b. Use care to provide sufficient incentive to
signal long-term performance expectations,
but do not tempt executives to adopt a
narrow short-term focus. Allocate capital in
the context of all other business needs so it is
put to the most productive ends.
3. Make pay performance contingent, focusing on
long-term value creation.
a. Make pay clearly contingent upon business
performance as derived from strategy and
risk assessments, not share price. Tying pay to
share price will likely increase the share price,
but in a way that puts the long-term health
of the company and its brand at risk. Pay
disconnected from long-term performance
generally signals that a Board has difficulty
in maintaining the focus of its executives on
long-term sustainability in the face of short-
8 See: Anderson, D.W. (2008). Are you listening to your owners? Directors must step up their game, once again. ICD Director, 139
(Aug), 22-25.
36 | Institute of Corporate Directors
term pressures when setting and evaluating
annual performance objectives and metrics.
Thus it is necessary to build explicit long-
term sustainability goals into performance
contingency. Pay practices must not
contribute to the risk of the company.
b. Relate incentive pay to behaviours and
business outcomes over which executives
have control. Rewarding performance caused
by factors beyond management’s control is
wasteful, dilutes contingency, and increases a
sense of entitlement to pay.
c. Provide risk-adjusted pay plans with
incentive pay delayed by a suitable time
period (e.g., one year or even more) to gauge
the sustainability of the performance results.
Let long-term incentive pay fall with poor
performance. Contingency should work with
downside risk as much as upside potential.
4. Simplify pay plans and stress test them.
a. For incentives to work as planned, the link
between what an executive does and the
pay consequence experienced must be
clear. Many pay plans are too complex,
losing the power of incentive to direct
behaviour. Complex plans also make it
difficult for Directors to know exactly what
they are committing to pay across a range of
performance outcomes.
b. Pay plans should be stress tested at various
levels of performance to ensure Directors
are aware of the full range of pay outcomes
embedded in the pay formulae. Boards that
have otherwise taken care to create pay plans
but failed to stress test them have found
themselves surprised with the magnitude of
executive pay outputs – particularly in equity
allotments and pension plans.
5. Monitor executive behaviour and performance
closely and consistently.
a. In well managed companies, employees
are subject to performance management
and have their pay decisions governed by
explicit criteria. Rarely do employees set
their own the evaluation criteria, write the
final evaluation and decide the range of
pay outcomes. Yet somehow CEOs – at the
 top of the accountability pyramid – have
historically been exempt from this reality.
Until recently, CEOs seldom underwent any
performance management. Boards just
did not do that. Pay decisions were often
based on a brief, unstructured discussion by
Directors of company performance (aided by
an informal self-report by the CEO). Systems
and mindsets must evolve to allow CEO
performance management to be conducted
with rigour and discipline.
b. Given that pay motivates executives to
reach the targets put before them, and not
always in the ways expected, it is important
for Directors to think from the executive’s
perspective about how such performance
goals can be met in the short-term, but
which may harm long-term interests.
Directors should discuss openly these
threats to sustainability and communicate
expectations of high ethical conduct to
executives.
c. Verify performance outcomes. Executives are
rewarded based in large part on reported
corporate performance. As numbers can be
manipulated, Directors must mitigate the
inherent conflict executives face in reporting
on their own performance by making
performance metrics and their assessment as
rigorous and transparent as possible.
d. Manage the paradox of performance
accountability: emphasizing accountability
can encourage contrary behaviour if
accountability is translated into pressure
to perform now. Indeed, heightened
accountability has shortened CEO tenure,
putting added pressure on CEOs to produce
results quickly. As a result, they focus more
intently on the short-term and have greater
incentive to manage numbers. Directors
must finesse this paradox by monitoring
short-term performance but diligently
rewarding long-term performance.
6. Learn to attract, retain and incent executives
with tools other than pay.
a. Challenge the premise that high
compensation is the most valid tool for
attraction and retention. Other factors
weigh heavily in the minds of executives in
making career decisions, such as the nature
of the challenge and the people (including
Directors) with whom they will work. A leader
whose primary motivation is money may
not be the best choice to lead and motivate
others to build a healthy culture and
represent your brand.
b. Create ambitious business goals for
executives who delight in solving business
challenges. Provide a Board culture of respect
and supportive counsel, allowing executives
to make full use of the wisdom of the Board
in their professional development and
growth of the business.
7. Improve executive selection and promotion
procedures.
a. Do not let pay carry all the burden of sorting
talent. A thorough selection process and
valid selection tools can enhance greatly
the likelihood of successful CEO hires by
evaluating a wide variety of criteria, including
executive motivations beyond pay. The
marginal return of such an investment
is considerable, particularly for large
companies. The level of sophistication Boards
demonstrate in hiring decisions often is
low, leaving Directors to rely on subjective
perceptions and beliefs, both of which are
subject to powerful biases. This reduces the
efficacy of the Board’s judgment in its most
important decision and simultaneously
makes the Board more susceptible to the
bargaining power of the CEO. As a result,
the CEO’s brand becomes more salient, and
Directors look to that which is concrete:
pay. Thus, money becomes the criterion
for judging talent, as money becomes the
proxy for value. The person with the highest
previous pay can be seen as the most
talented executive (relying on the market
as arbiter); this guarantees escalating pay.
Consistent with this logic, Directors can
justify paying the most (hiring the best talent
money could buy) because they have bought
themselves insurance against future claims of
poor company performance.
b. Pay decisions must serve the succession
interests of the company. Choose your
strategy in light of risks, then choose the type
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of leaders required, and only then decide
what pay profile is needed to attract those
leaders.
8. Increase the supply of talent, through
diligent succession planning and leadership
development.9
a. This not only produces a better equipped,
more committed, and more productive talent
base, it is an essential means to increase
the internal supply of executive talent,
giving Boards more leeway in selection and
subsequent negotiation decisions, thus
increasing the bargaining power of Boards.
CEOs who fail to develop successor talent are
strengthening their own bargaining power
by maintaining talent scarcity.
9. Ensure Directors are educated in the business
and in compensation.
a. Directors cannot responsibly and effectively
direct the affairs of a business, nor guide
its executives with the powerful tools of
pay, without a thorough understanding of
the business. To eliminate the arbitrariness
of executive compensation, Directors
should play a central role in setting the
risk profile, performance targets and
associated metrics by which they will judge
executive performance. To the extent
possible, this framework of accountability
should be shared within the organization
and with investors. A structured dialogue
on performance is a guard against
arbitrary decisions and the biases that can
exacerbate them.
b. Similarly, Directors must learn the language
of pay, study complex pay plans and
understand human psychology in order to
use the tools of pay with precision. Language
influences thinking in subtle ways; instead
of labeling the committee “Compensation”,
consider labelling it “Performance
Accountability”, to emphasize the point it is
meant to serve.
c. Directors must guard against their own
biases and frame of reference regarding
wealth when making pay decisions. When
pay decisions are made in an unstructured
way, one of the better predictors of pay is
9 See: Anderson, D.W. (2007). Do you know your next CEO? What directors can do to succeed at succession. ICD Director, 135 (Dec), 24-28.
38 | Institute of Corporate Directors
the relative wealth of the Directors making
the decision. This is because their decision-
making is biased by anchoring their
judgment on their own salaries or wealth and
making a social judgment that the CEO is
their peer and is thus deserving of equitable
treatment. Enhanced Director engagement
with executives, premised on trust being
necessary to work collaboratively, has also
meant that Directors are in a difficult social
position of having to evaluate people they
know well. And finally, the fact that Directors
are evaluating executive performance
against a strategy they themselves helped
craft and approved may constrain their
objectivity, as they want their contribution
to be successful, too. Directors need to test
the soundness of their thinking by hearing
multiple perspectives.
10. Leverage investor perspectives on pay.
a. Owners have only the blunt instrument
of Director election as a formal means of
registering their opinion on pay. While
that may change, Directors should engage
investors in dialogue about pay philosophy.
b. Directors have a difficult task working
closely with executives and making the
biggest decisions affecting their lives. When
it is useful to lean on external support to
make the right decision, Directors should
know how to leverage their relationship
with investors.
Why does this matter?
The executive pay decisions Directors make impact
not only on their companies, owners and executives
involved, but also and, more importantly, on the
public’s support for corporations and capitalism.
Reinforcing fairness in business enhances the
legitimacy of corporate leadership and encourages
society’s acceptance of pay differences earned
through merit.
David Anderson is the President of The Anderson
Governance Group (www.taggra.com).
He can be reached at (416) 815-1212 and
david.anderson@taggra.com