Executives Benefit From Compensation Committees

NEW YORK – Compensation arrangements for corporate CEOs are great, especially when employees and business associates are sitting on compensation committees. And CEOs with the greatest stock ownership are more likely to have insider directors (e.g.: employees and business associates) sitting on those committees, according to a Fordham University study. “There has been a lot of controversy about having insiders [business affiliates]on the compensation committee,” said Associate Accounting Professor Harry A. Newman of Fordham’s Schools of Business. “Can you imagine if you were on the compensation committee and you worked for me, the CEO, and you had to determine my compensation? You can see the potential conflict of interest.” Newman recently completed two studies examining issues related to having insider directors serving on compensation committees. The most recent study, “The Impact of Ownership Structure on the Structure of Compensation Committees,” appears in the July issue of the Journal of Business Finance and Accounting. This study also finds that when the percentage of company ownership among non-executive employees is greater, the percentage of insiders on the committee decreases. Congress, the National Association of Corporate Directors and others have criticized the appropriateness of having insiders on compensation committees. In an unrelated 1992 poll of directors of Fortune 1000 firms, 84 percent of respondents believed that compensation committees should be composed entirely of outside board members. But until a year ago, no one had documented the impact of insiders on CEO compensation. Newman’s other study, which was coauthored by Fordham Associate Professor Haim Mozes, found that CEOs receive preferential treatment at the expense of shareholders when insiders serve on compensation committees. That study was published in the autumn 1999 edition of the Financial Management journal. According to that study, when a company’s performance is poor, the CEO tends to receive more compensation as performance worsens. The CEO often receives extra compensation in the form of stock options to partially make up for declines in the value of his or her original stock options. No such practice was found in firms that did not have insider directors sitting on their committees. Fordham’s Graduate School of Business Administration was established in 1969 and has been recognized nationally for the quality, innovation and comprehensiveness of its programs, which prepare graduates for global competition. The school’s part-time MBA program is ranked 14th by U.S. News & World Report.