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Directors Blame Compensation Consultants for Excessive CEO Pay Problem

February 7, 2008
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A rising number of corporate directors are expressing their frustration with spiraling CEO pay. Just don’t ask them to take any responsibility for it.

Roughly three out of 10 directors believe that CEO compensation is “too high in most cases,” according to a new study by recruiter Heidrick & Struggles and the University of Southern California’s Marshall School of Business.

Even more shocking: Nine out of 10 directors said they thought CEO pay should be no more than two to three times higher than that of the next highest-paid executive. The study polled 227 directors of U.S. public companies.

The average CEO of an S&P 500 company got $14.8 million in total compensation in 2006, a 9.4 percent rise from 2005, according to the Corporate Library.

The findings of the USC study beg the question: Why are these board members signing off on excessive pay packages? After all, a board’s compensation committee is charged with setting the level and type of compensation given to chief executives.

Ed Lawler, a professor of business at the USC and co-author of the study, says that board members swear it’s not their fault; compensation consultants, they claim, are the major reason CEO pay is so out of control.

“Directors are saying that in the interest of making more money, compensation consultants keep coming up with new incentive products that boards have to buy to stay competitive with their peers,” Lawler says. “So in some ways, yes, they contribute.”

But Lawler adds, “Compensation consultants don’t sign off on executive pay, directors do.”

Rep. Henry Waxman, D-California and chairman of the House Oversight Committee, has been investigating the role of compensation consultants in setting executive pay. Last week, he asked the compensation committee chairs of all Fortune 250 companies to provide additional information on how consultants are used to determine pay.

In December 2007, Waxman’s committee issued a scathing report that found widespread conflicts of interest among compensation consultants.

The report claimed that roughly half of Fortune 250 companies used outside advisors that were also providing much more lucrative services—such as employee benefits administration, human resources management and actuarial services—to these major clients at the same time.

Filed by Jeff Nash of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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