Five Questions about Executive Compensation – Special Interview with Eleanor Bloxham, CEO, The Value Alliance and Corporate Governance Alliance, United States of America – June 4, 2012

On the first Monday of each month Emerging Markets ESG publishes a special interview with an academic, expert or practitioner about a specific topic with relevance to environmental, social and/or governance (ESG) issues.

This month’s interview, the third interview in the special interview series, is about executive compensation and is with Eleanor Bloxham, Chief Executive Officer (CEO), The Value Alliance and Corporate Governance Alliance, United States of America.

Founded in 1999, The Value Alliance has provided education, information, and advisory services to directors and executives from hundreds of companies including large Fortune 500 multinationals as well as smaller entrepreneurial start-ups, both publicly traded and privately held corporations, and both taxable and tax exempt organizations. Eleanor Bloxham is the Founder and Chief Executive Officer of The Value Alliance Company and the Corporate Governance Alliance. She is recognized internationally as an authority on corporate governance and valuation.   She is an author, speaker, and advisor to organizations on governance, public policy and board related matters. Currently a contributing columnist for Fortune, she has written extensively on the topics of governance, value, public policy and economics. She is the author of two books, Value-led Organizations and Economic Value Management: Applications and Techniques (published by John Wiley and Sons).  In addition, she is the author of the governance chapter of The Investor Relations Guide (published by Kennedy) and many articles in director, business and financial publications.  She has published Conversations that Build a Bridge of TrustTM, a video library of over 800 taped segments and transcripts which include conversations with directors, CEOs, institutional investors and policy advocates. This library of information is equivalent to 15 full length books on board and governance topics. Together with John M. Nash, she published The Corporate Governance Alliance Digest, a publication on corporate governance and value topics.

Emerging Markets ESG:  Where would you rank executive compensation in the hierarchy of corporate governance issues?

Eleanor Bloxham:  I’d rank it at – or near – the top. You spend money on what you deem important. In the US, because of disclosure rules, executive compensation is a public statement about what is important.

Executive compensation is a powerful way to set the tone at the top.

While a decision about executive compensation represents a capital allocation decision just like any other important capital allocation decision, there is a difference.  Compensation allocation decisions drive the way executives think about all the other capital allocation decisions they make. Is stock price all that matters? Is earnings per share (EPS) what counts? This impact occurs whether or not the company explicitly uses similar metrics for its other decisions. Because pay decisions are being made on those metrics, executives will consider: what might the impact be on stock price? How will this impact EPS?

Generally, the impact is in proportion to compensation size.

Emerging Markets ESG:  Would this hierarchy be the same in developed countries and in emerging markets, or, do you see country-specific, cultural and/or regional differences?

Eleanor BloxhamIn emerging markets, a higher proportion of firms are family owned or closely held. Emerging market companies generally have lower incentive based pay and overall smaller paychecks, as a result. As a result, decisions on pay impact overall decision making less.

Emerging Markets ESG:  What is the nexus between executive compensation and (socially) responsible investment?

Eleanor BloxhamThe reason for bonuses (in whatever form they take) is to provide rewards for certain behaviors or outcomes. The behaviors or outcomes that are rewarded are the ones that will be pursued.  It’s not just theory. It works in practice.

So whether socially responsible or not, all responsible investors should care about executive compensation because compensation influences governance of the firm and what executives focus on.


Medicating executives with very high executive compensation has a number of adverse side effects. One practical impact is it impairs the ability of an executive to understand and relate to the company’s stakeholders: employees, shareholders, customers and others. Pay inequality, an impact of too many programs, can dampen employee engagement and productivity. But to socially responsible investors, there are other impacts on society also. Pay inequality is a social problem as well as an economic one.

Payouts in stock options and restricted stock can cause poor decision-making and aberrant behaviors, dangerous to the firm, according to a 2011 December Fed Working paper. That’s important to all investors. The 2011 December Fed Working paper showed the impacts at individual firms, multiplied across the economy, cause volatility in the economy as well, exacerbating booms and busts. Socially responsible investors should be more concerned than they seem to be with the allocation of large amounts of capital that actively promote social ills.

Emerging Markets ESG:  Executive compensation has skyrocketed in the United States of America during the past two decades.  Furthermore, during this same time period the gap between the average compensation of CEOs and rank and file employees of listed companies in the US has expanded exponentially, from approximately 40 to one to 400 to one.  How do you explain this development?

Eleanor Bloxham: A lethal combination of investor neglect and investor encouragement.

Outspoken investors were greedy. They wanted executives to boost stock price so they had a “brilliant” idea. If executives own stock like we do, they’ll do everything to boost the value of our holdings, the thinking went. So hand out stock options and restricted stock. Almost universally, investors bought into this.

Boards obliged. It seemed to make CEOs happy and once the game started it has just accelerated. No one has been willing to blow the whistle and say we made a mistake, including many socially responsible investors.

Emerging Markets ESG:  Since Steve Jobs death, much of the discussion about the change in leadership at Apple has focused on sustainability.  How does executive compensation fit into this discussion?

Eleanor BloxhamFirst, I don’t like a narrow definition of sustainability. Besides the environment, sustainability as a concept rightfully reflects other concerns as well. How sustainable it is to work people to the point of break down, as an example. How sustainable is the company, does its presence promote or erode economic sustainability, quality of life, etc. Does it do good or harm?

Tim Cook has been given stock options worth nearly $400 million. So if investors bid up the price of the stock, he will be rewarded handsomely. Overwhelmingly Apple shareholders seem happy with that as the basis of his pay.  Shareholders voted overwhelming “Yes” when they had their say on that payday this year.

So do investors at Apple care about sustainability? As it stands now, if investors bid up the price of the stock irrespective of Apple environmental policies or other actions impacting sustainability, he will be rewarded. Maybe socially responsible investors believe they can trust other investors on this score.

But even if Cook is great for environmental sustainability and labor practices in China, the Apple issue is deeper than that.

What does paying one CEO that amount of money in one year do to the pay ecosystem?  All the boards (let’s call them group A) who use Apple as a peer to help set pay levels are impacted by this huge package. How can they make their CEO happy and keep up with the Joneses? So too are boards (let’s call them group B) who use group A as peer comparisons. And those who use group B, and on and on it goes.