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Abraham Zaleznik
Scholar

Abraham Zaleznik

Abraham Zaleznik is the Konosuke Matsushita Professor of Leadership, Emeritus, at the Harvard Business School.

Compensation Committees Gone Wrong

The particular blind spots under scrutiny here result from the insensitivity of boards of directors and their compensation committees.

In theory, these committees are accountable to the full board. In practice, they are closed to the full board, due in part to the presence of compensation consultants who implicitly act to protect the committees from the rigorous oversight of the full board. In turn, boards often turn a blind eye to the work of the compensation committees. Executives who are the beneficiaries of comp-committee laxness typically accept the decisions they are not inclined to bite the hand that feeds them.

To deal more rationally with outrageous bonus awards requires a critical capacity on the part of boards and their compensation committees. Boards should appoint a special committee to examine how comp committees function and use outside consultants. This special committee should report to outside directors and should publish their report as part of the proxy statement.

By Abraham Zaleznik

 |  February 2, 2009; 3:09 PM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: The Tuchman Folly Syndrome | Next: Shareholder Control

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If corporations have so much money to to justify these outrageous compensation, why not tax them at a higher rate as was the case in the 70s. May be the tax rate should be tied to compensation package these firms award to their executives. We are told these are smart people. I would say NOT. Even if they are, nothing justifies these packages. By the way, the same people who millions for themselves fight tooth and nail to keep low wages for everyone else so they can have more for themselves. This makes them theives pillagers.

Posted by: kevin1231 | February 5, 2009 10:15 AM
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Lets not stop with the higher executives. What about sports figures ? Actors? Gone are the days when a family of four could enjoy a night out at the ball game. They could possibly spend up to $200 or more. Enjoy a movie? Only if you mortage your house. Salaries have gone out of control. Think on it, are these people really worth millions of $$ a year? I think not

Posted by: YAAD2000 | February 5, 2009 7:46 AM
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blakely1 said...
"How do Chris Dodd & Charlie Rangel travel?"

Commercial aircraft (usually from DC National Airport) or Amtrak (from Union Station).

Posted by: critter69 | February 5, 2009 6:10 AM
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Are there actually people who don't know that boards of directors of major corporations are mainly composed of the senior officers of other corporations, who sit on each other's boards and have pretty much zero incentive to stop each other from making off with as much of the shareholders loot as they can all carry? Sure, all we really need to do to fix this problem is wag our fingers and tell those darned foxes to start doing a better job of watching those hen-houses.

Posted by: CalD | February 5, 2009 1:46 AM
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There is no doubt that some companies'bonus policy is rediculous,however,so are movie stars'
salaries.
These banking stars ,whose problems started with the government insisting that their banks take mortgages, that they knew were poor risk.
If a man is worth $5,000,000,is he going to take $500,000? Would you? He will move to start his own business or he'll move to another bank or another country.
How do Chris Dodd & Charlie Rangel travel?
I have no idea, but I suspect there's a private plane involved.How much of this problem was engineered by them?
I do think that these "brilliant " men should have had more sense than to pass
out billions of bonuses on the taxpayer's dime , but I think capping their salaries
is a double edged sword.
Frankly,if I were CEO of a company,that is already beholden to the government,I'd move right now,in order to get out of government scrutiny.

Posted by: blakely1 | February 4, 2009 11:49 PM
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Why should compensation committees be beholden only to the board of directors, which is to say, upper management? Labor, shareholders, and customers all have a stake in how much pay executives receive. All should be represented.

The way to mend this problem is simple: change the corporation tax laws. Any compensation determined other than by a balanced comp committee (i.e., one in which all four categories are represented and none is in the majority) should not be treated as a deductible business expense for tax purposes.

Posted by: donnolo | February 4, 2009 10:50 PM
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