Q&A with Compensation Consultant Pearl Meyer

A top consultant explains how CEO compensation has gotten out of hand and how to fix the problem without sacrificing an important executive incentive

by William J. Holstein

Boards of directors must quicken their pace in coming to grips with compensation for chief executive officers or risk losing control of their companies to a chorus of shareholder activist critics, says Pearl Meyer, a leading compensation consultant at Steven Hall & Partners in New York. But they should resist efforts to link annual CEO compensation to the company's share price, and the Securities & Exchange Commission has more work to do on the issue, she adds. Here are edited excerpts from a recent conversation:

What's at stake in the fight over CEO compensation?

Our boards of directors are being challenged by investors along with special interest groups as well as academics, legislators, and regulators. They are seeking a power shift in the governance of the corporation. Unfortunately, executive compensation is being used as a wedge issue by these groups to assert influence and control over the corporation in pursuit of their own agendas. Many of these special interest groups have objectives with which we agree. They include the union and government pension funds endeavoring to protect the pensions of their members. Other activists are trying to protect the environment and effect social change. But in addition to these groups, we have the hedge funds, private equity funds, and short-term investors seeking healthy gains. The way they're getting in is by protesting something that is very obvious, which is executive compensation.

Are boards getting smarter about how they manage CEO compensation?

Over the past several years, we've gone from the imperial CEO and the passive board to a proactive board which is now comprised almost totally of independent directors, who have independent outside counsel from firms such as ourselves advising them on pay for performance and marketplace comparability, as well as internal performance parameters. The environment has changed totally over the past five to seven years.

Has one issue been that compensation committees did not really have a firm grip on all the elements of the pay packages they were granting top management?

That's quite right. In prior years, the responsibility for benefits and perquisites was confined to people within the corporation. Executive compensation, meaning direct pay, which is salary and bonus, and incentives such as equity participation, came under the purview of the executive compensation consultant, meaning people like myself, who worked with managements and the boards. Now we report solely to the compensation committee and bring together the total tally of remuneration. Before, there were two separate pieces and nobody added it all up together.

In other words, boards didn't really know what they were doing?

They did, but there were two or three separate pieces. But they didn't really add it up together until the past few years because of tradition—that was always the way it was done.

Are we going to see a flattening out in the rate of increase in CEO compensation?

I don't know. It's a function of performance with respect to profitability; returns; shareholder value, of course; and the marketplace for executive talent. If a company's performance dropped, like Merrill Lynch (MER), which just reported a steep decline in earnings, while Goldman Sachs (GS) and Lehman Brothers (LEH) reported higher earnings, one would expect Goldman Sachs and Lehman executives to show increases in their compensation. We might expect to see Merrill Lynch's down.