Executive compensation holds as much mystery and magic as the Great Wizard of the Emerald City. Of course, if the curtain were to be pulled back, the real magic would be found in how a lack of information, combined with fear and imagination, have colored the pay of all executives with the same brush. Remember that when Dorothy and Toto met the wizard he was just as unhappy and scared as they were. I find it amusing and frustrating that there is so much misinformation about executive compensation. Let’s state the givens: Yes, there are many CEOs who make more money than most people can comprehend. Yes, executive compensation is a complex arena with many assumptions and estimates being made at any given point. Yes, companies spend a lot of time and effort on disclosure. So why am I frustrated?
Everyone discussing executive compensation has some type of an agenda. Companies don’t want to upset their shareholders or fight with the media. Journalists want a story that stands out among the noise of the day. Shareholder advisory firms want to show their knowledge and ability to shift practices. Consultants want to defend their past practices or point out their superiority when compared to pay at non-clients. Survey data providers want information that can be easily understand and digested. Politicians want to look good to their constituents without upsetting their contributors.
Each perspective leads to a different approach to the positives and negatives of executive compensation. Companies tend to paint things grey and play it safe. The media tends to hyperbolize and point out the outliers. ISS and Glass Lewis point out new issues to remain relevant and gain new clients. Consultants point out their successes and explain their failures as “beyond their control,” or “not their fault.” Survey data is defended as holistic even when it is often made up of a tiny fraction of representative companies. Politicians focus on the obvious problems and talk about them like they represent the majority of pay practices (but, they seldom act in the same way.)
All of this posturing has turned the topic of executive compensation into a kind of omnipresent wizard with terrifying powers and a capricious temper. It’s spoken about in hushed terms or artificially confident booming voices. The curtain is never really pulled back, since everyone already “knows” what’s behind it.
Imagine if the wizard had simply invited Dorothy behind the curtain the moment she arrived. Consider what his life would have been like had he rejected the mysticism of his new role from the day he arrived in Oz. Of course, he wouldn’t have had the power over people that mutual fear and misunderstanding granted him. Perhaps he wouldn’t have also had a lonely misunderstood existence that made him miserable.
When preparing this year’s proxy disclosure, say on pay voting and overall communications regarding executive compensation, consider pulling back the curtain on your pay. If you give people the truth only the crazy will find a way to dispute it. If you give people the whole picture you will lose the power of mystery but, in return, gain the power of understanding.
(Dear Readers: Yes, I know that I have used the Wizard of Oz twice in recent posts. No, I don’t know why, since I have not seen the movie in several years. Who knew it was created to inspire compensation articles?)