Corporate Governance

Executive pay is out of control in this country.

CEOs of Fortune 500 companies now make about 520 times the average worker. Yale School of Management argues they make about three times more than their counterparts in Japan and more than twice as much as those in Western Europe.

This disturbing trend has gotten worse over the last few decades ? a period when this country has increasingly lost its economic lead. The trend suggests that CEOs have become increasingly focused on their pay packages and not the welfare of shareholders, employees, stakeholders and our national economic well being.

A major reason executive pay packages are ballooning is because of the incestuous relationships between boards and CEOs who conspire to give lucrative pay-and-perk packages to each other. But it is also due to the egregious use of "compensation consultants" that soak up multi-million dollar fees to provide strategic counsel to boards and in addition advise ever higher pay packages to top managers they presume to oversee ? whether they perform well or not.

The use of these compensation consultants, which are paid handsomely with shareholder money, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not.

According to a recent study by researchers at the University of Southern California, Executive Pay and "Independent" Compensation Consultants (2008), executive and director pay is higher at companies where consultants are hired. The study found that median CEO compensation is $1.5 million in companies not using consultants, $3.0 million in companies that purchase surveys but do not directly retain consultants, and $4.2 million in companies that retain consultants.

In addition, companies now may use multiple pay consultants from different firms to justify or legitimize pay packages that are unusually generous. A company using three or more consultants pays almost 25% more to its CEO than a company using only one consultant. Companies can bring together recommendations from multiple consultants to create a single generous package or ignore recommendations that the CEO is unhappy with. A 2007 study done for Representative Henry Waxman showed that 25 of the 113 Fortune 250 companies disclosed that they hired multiple compensation consultants in 2006.

There is a conflict of interest if a consultant provides both executive compensation advice and other services to the same company. The Waxman study concluded, "In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interests was 67% higher than the median CEO salary of the companies that did not use conflicted consultants."

"Over the period between 2002 and 2006, the Fortune 250 companies that hired consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants," the report found.

It also said that compensation consultant conflicts of interest are widespread. Over 100 large publicly traded companies hired compensation consultants with substantial conflicts of interest in 2006. The study found that in 2006, over two-thirds of the Fortune 250 companies that hired compensation consultants with conflicts of interest did not disclose the conflicts in their SEC filings. To list whether there is a conflict of interest in a SEC filing should be required. The study found that in 30 instances, the companies informed shareholders that the compensation consultants were "independent" when in fact they were being paid to provide other services to the company.

Watch this.

The use of compensation consultants is clearly growing. Of the 880 firms included in a recent study at University of Pennsylvania?s Wharton School of Business called The Role and Effect of Compensation Consultants on CEO Pay, 86% used a compensation consultant. "Little is known about the role of compensation consultants in the design of incentive schemes or how they influence executive pay levels," the researchers wrote.

The failure of a company's board of directors to take charge and adopt responsible executive compensation policies has forced more shareholders to take notice and demand tangible progress on this issue. To stop these practices we must demand change in Washington. We have to beat back dominant lobbying groups like the Business Roundtable, which protects the status quo. To fight this, we must show Congress that a large number of shareholders are fed up. Our objectives can be accomplished if you sign up for United Shareholders of America.