Will the New Executive Compensation Rules Matter?

The financial reform legislation requires non-binding shareholder votes on executive pay; more stringent rules for the independence of compensation consultants; the expansion of existing stock exchange rules prohibiting brokers from voting uninstructed shares held in street names on some issues to include say-on-pay votes; a requirement that companies adopt and disclose clawback policies for compensation resulting from misleading financial statements; and a requirement that companies report on the ratio of CEO pay to median pay.

The news is clearly good for the consultants who will help companies navigate through all this, but will it have much impact on executive pay or just change the window dressing? That's hard to predict, but experience does not give cause for optimism (or pessimism if you are a CEO). Prior changes, such as the revised accounting rules, SEC compensation disclosure rules, and Section 162(m), which limited deductions for executive compensation that were not incentive-based, all had the effect of changing some of the structure of how pay was delivered, but were more form over substance. Section 162(m) in particular deserves a spot in the museum of unintended consequences for actually encouraging mega-grants of equity compensation instead of reducing executive pay as it was intended to. Pay for top executives continued to grow much faster than pay for anyone else, despite expectations that these changes might actually slow the growth. In fact, disclosure may have accelerated growth as CEOs and other officers found out more about what their peers made.

How pay decisions are presented to shareholders, and the specific composition of pay, could well change, especially making more of the pay contingent on longer-term performance. But experience suggests that boards have, in effect, set a target for how much executives should make, then fiddled with ways to get there. Unless there is a sea change in how both the role and significance of the CEO and other top executives are viewed, I expect more noise than action.