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Tech and bank executives increasingly being scrutinized over compensation

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Compensation Advisory Partners LLC Partner Susan Schroeder joins Yahoo Finance Live to discuss the scrutiny surrounding the compensation of tech and bank executives.

Video Transcript

[MUSIC PLAYING]

- Welcome back, everyone. Executive pay is under scrutiny as rising inflation and fears of a weakening economy bear down on the market. Intel and JPMorgan recently saw shareholders vote to reject the pay packages of their CEOs and other executives, while Amazon shareholders narrowly approved compensation packages for top leaders Andy Jassy and others. Although the moves are all advisory, the big question remains, should the big bucks be brought down?

Joining us with more is Susan Schroeder, who is a partner over at Compensation Advisory Partners. Susan, great to have you here with us. OK, who's in the right, who's in the wrong here? I mean, this is a challenging environment for executives, but at the same time, it's also extremely challenging for the equity markets and shareholders, who are monitoring exactly how much the executives are making in these compensation packages.

SUSAN SCHROEDER: Oh yes, yes, they are. It's a very interesting time where we live. The pay packages are definitely increasing and becoming more complex with all of the various inflationary pressures and other macroeconomic factors.

- Susan, is the exorbitant pay by the likes of Jamie Dimon and other CEOs to blame for the inflation raining down on the average consumer?

SUSAN SCHROEDER: Oh, no. I don't think we can blame it on that. It's just-- it's just another factor that needs to be considered. What we really have going on here is the agency theory that we learned in economics between shareholders and management, and how to align the interests, and how to align pay and performance. And that's what we're seeing going on here, is that these pay packages that we thought were aligning pay with performance have become so complex. And really, they're becoming way too much guaranteed because of the concern about attraction and retention of the key talent, of the CEOs. And so because they're more guaranteed and shareholders now have the extreme volatility with the stock market, the agency theory is out of whack. The alignment, the alignment is out of whack.

- Susan, why is this happening? If one sits on a board of these public companies, how can you-- sits on the compensation committee overseeing pay for these CEOs, how could one, in good conscience, sign off on a pay package worth hundreds of millions of dollars? Why is it happening?

SUSAN SCHROEDER: Well, that's a tough-- it's a tough job, you know? It's a tough job to be a board member. They have to balance all of these interests, all the various constituents-- the management team, the shareholders, the community, the employees. There's a lot of stakeholders going on. And so they're really doing their best efforts, their fiduciary duty to align the pay and performance. But there's just so many things going on right now with inflation, with the tight labor market, too many factors.

And what's happened is the comp committee members have to use discretion and their best judgment. And that's really hard because then it's up to-- that can always be second guessed, right? And so we're not seeing this rigorous performance criteria because, especially through the pandemic, no one knew what was going to happen, right? And so it's really hard to have these factors that are so strict and rigorous. You have to apply discretion. So that's what we're seeing, the discretion of the board members. And we're going to have to trust their judgment.

- Susan, what we had seen during the global financial crisis, and even more so what we had seen during the coronavirus pandemic, the onset of that and the economic detriment that incurred thereafter, you did see some executives stepping forward to say, hey, I will pull back from the actual compensation that I'm getting in the form of a salary and just lean into how I'm able to perform. Do you believe that, in the face of some of the kind of warning signs that the economy is showing here, that we'll see some executives actually step up and do similarly?

SUSAN SCHROEDER: Very, very good question. So during the pandemic, we did have this, quote unquote, shared sacrifice. And executives did take pay cuts along with employees. However, because the economy did rebound so much in 2021 and there was performance, a lot of that now has been given back to executives. So the shared sacrifice has kind of gone away.

Now, what I do think for the future, this inflationary environment, we're definitely headed into a recession. So I think that is what's going to put the halt on this ratcheting up of pay, is that this recession is going to do it for us. And so I think they might be forced to do pay cuts.

- Susan, let me go back to that-- what I asked you at the top on inflation and CEO pay. If you're paying your CEO hundreds of millions of dollars a year, at some point, don't you have to raise prices for your products and services on the average person just to pay for that big check?

SUSAN SCHROEDER: Well, I think it's a little more broad than that. I do think that pay is going up for all levels of the organization. We just see it more at the top because most of it is driven by the equity component of the compensation. And now that-- and one good point is that is not received right away, because it usually vests and pays over time and is based on stock price performance, which could go up or down.

But I do think wages, which is a good thing, are increasing all the way up the chain. You've got this pay compression. So and you've got to make sure that pay is appropriate and you have internal equity from the bottom to the top of the organization.

- All right, we'll leave it there for now. Susan Schroeder, Compensation Advisory Partners partner, good to see you. Have a good weekend.