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A Sarbanes-Oxley Act for Human Resources

October 2, 2003
Related Topics: Variable Pay, Compensation Design and Communication, Featured Article, Benefits

One of the more intriguing recent ideas to stop CEO pay abuse would extend the stiff standards of the Sarbanes-Oxley Act to executive pay and require that compensation proposals meet best-practices standards and be independently reviewed.

    Matt Ward, senior vice president of Aon Consulting, believes there ought to be audits of executive compensation in the same way that the Sarbanes-Oxley Act requires accounting and financial audits, with stiff fines and prison penalties for those who break the rules. Such a requirement would impose additional legal burdens on human resources executives and compensation consultants. But it also might result in the same kind of premium being placed on compensation specialists that Sarbanes-Oxley did on CFOs and accountants. Corporate boards are now beating the bushes for financial officers to fill board seats so they will have the kind of specialized knowledge required by Sarbanes-Oxley, which was enacted in 2002 as an antidote to accounting scandals that plagued companies such as Enron, WorldCom and Tyco.

    Ward believes that audits of executive compensation should be required, with certifications similar to those required of financial audits. The current system, which leads to compensation abuses such as enormous pay raises even if the company is performing badly, he says, is often the result of cozy relationships between CEOs, board of directors’ compensation committees and consultants hired by large consulting firms hauling in hefty fees. He says that compensation abuses would be cleaned up quickly if the consultants advising compensation committees were required, as auditors are, to file a signed letter with proxy statements asserting that they have examined the compensation system and found pay levels to be within generally accepted norms of such things as pay for performance. The findings would then be reviewed by independent pay auditors, just as an outside auditor might give an opinion on a company’s financial records.

    "It wouldn’t eliminate high pay; it would just eliminate high pay without corresponding performance," Ward says. "I think this is what offends people." It would also pull human resources executives much deeper into the compensation system. "I have been in so many situations where HR people were disgusted with executive-compensation programs and couldn’t say anything," he adds. Putting teeth into reporting systems would require them to speak up.

    But Ward isn’t holding his breath. "Nobody wants the compensation system cleaned up," he says. Without naming names, he notes, "I had a CEO say to me that the only thing wrong with CEO pay is the criticism it’s been getting lately."

Workforce Management, October 2003, p. 31 -- Subscribe Now!

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