Executive compensation – ‘a system so perfect that no one needs to be good’

Ed Waitzer - Publications

Executive compensation - 'a system so perfect that no one needs to be good' [The Globe and Mail]


Special to The Globe and Mail / Published Friday, Dec. 11, 2015

One installment in The Globe and Mail’s recent series on executive compensation focused on the pernicious effects of compensation consultants. The ability of boards to rely upon them to satisfy their statutory duties to act diligently and in the best interest of the
corporation often serves to relieve directors of their sense of (and legal) responsibility and contributes to increases in compensation levels.

Having identified these and other “governance experts” as part of the “problem,” it would be remiss not to also point to the critical roles that legislation and regulation have played in creating what is becoming an even broader public-policy concern.

In addition to the regulatory safe harbour that corporate law creates by allowing directors to rely on the advice of experts to avoid liability – even though the experts aren’t bound by the same statutory duties as directors – there are at least three other regulatory effects at the root of current challenges with executive compensation.

The simplest was deciding to regulate the disclosure of executive compensation. It’s difficult to argue against transparency. As conservative social critic Irving Kristol has argued, alienation and distrust are bound to result if the distribution of power, privilege and property “no longer seem in some profound sense expressive of the values that govern the lives of individuals.” While compensation disclosure has facilitated such normative judgments, it has also led to a dramatic “ratcheting up” of compensation, as many predicted. No board likes to think that their senior management team is below average. Regulating disclosure or any other conduct also encourages a “compliance” mentality – doing things right, rather than doing the right thing. The risk is that compliance tends to undermine a sense of personal responsibility and inhibit performance.

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