Steven Clifford Says You Don't Need a Compensation Consultant

Episode Summary

Executive Summary: The episode features Barry Ritholtz interviewing Stephen Clifford, former CEO and board member, about his book critiquing U.S. executive compensation. Clifford argues CEO pay has been systematically inflated by consultants, peer benchmarking, stock options, and passive boards, creating misaligned incentives, weaker investment, lower morale, and broader inequality. He proposes blunt reforms, including tax penalties on excessive executive pay and longer-term restricted stock.

Main Topics: The rise of the CEO pay machine (Priority: 5/5): Clifford explains how modern executive compensation evolved into a self-reinforcing system that reliably increases CEO pay regardless of performance. Consultants and peer benchmarking (Priority: 5/5): Compensation consultants use highly selective peer groups and 75th-percentile benchmarks that rationalize higher pay and create an upward spiral. Stock options, shareholder value, and bad incentives (Priority: 5/5): Stock-based pay ties executives to short-term share prices rather than durable company health, encouraging buybacks and accounting-focused behavior. Board capture and weak oversight (Priority: 4/5): Boards are self-perpetuating, often populated by CEOs/ex-CEOs, and routinely rubber-stamp compensation packages while avoiding conflict. Economic and social consequences (Priority: 4/5): Clifford argues excessive executive pay worsens inequality, weakens worker morale, reduces consumer spending power, and harms long-term growth. Proposed reforms (Priority: 4/5): He advocates blunt policy tools like a luxury tax on pay above a threshold and compensation structured as long-term restricted stock with performance hurdles.

Key Arguments: CEO compensation rose far faster than worker pay because consultants shifted the norm from internal equity to external peer comparisons. Peer groups are not objective; companies choose peers with already-high CEO pay, ensuring upward ratcheting. Stock options and shareholder-value ideology encourage maximizing current stock price rather than long-term enterprise value. Executive pay is often weakly or negatively correlated with actual company performance and is frequently better understood as pay for luck. Large share buybacks crowd out R&D, plant investment, product development, and workforce investment. Board structures and director incentives make genuine pushback unlikely, since directors benefit from the same system and fear losing board seats. Extreme pay inequality depresses morale, reduces consumer demand, and imposes broader social costs beyond the corporation. Meaningful reform likely requires external pressure or legislation rather than voluntary board action.

Data Points: CEO pay growth vs. worker pay: 90 times faster since 1978 - Clifford cites long-run U.S. CEO compensation growth relative to typical worker wages. CEO-to-worker pay ratio in 1978: About 26:1 - Average large-company CEO pay ratio before the modern pay escalation. CEO-to-worker pay ratio today: 300:1 to 700:1 - Current U.S. ratio discussed as evidence of extreme pay inflation. Fortune 500 CEO internal promotions: 75% - Most Fortune 500 CEOs are promoted from within rather than hired externally. Former public-company CEOs among Fortune 500 CEOs: 2% - Very few Fortune 500 CEOs previously ran another public company. Top-paid CEOs (2011-2014): 4 CEOs earned more than $100 million per year - Example used to show pay can be far above what performance justifies. Share buybacks by S&P 500 over 10 years: $3.7 trillion - Clifford says this capital was used to support stock prices instead of long-term investment. R&D spending change over same period: Cut by 50% - He says S&P 500 companies reduced R&D while aggressively buying back shares. Plant and equipment spending change over same period: Cut by 50% - Investment in physical capital also fell as buybacks rose. Average CEO-to-worker ratio in Japan: 16:1 - Illustrates how unusually high U.S. CEO pay is by international comparison. Average CEO-to-worker ratio in Denmark: 48:1 - Used as another comparison point for lower executive pay abroad. Average CEO-to-worker ratio in the UK: 85:1 - Shows U.S. ratios are far above other developed markets. Share of GDP from consumer spending: 70% - Clifford uses this to argue inequality hurts growth by reducing broad purchasing power. Share of economic gains since 1980 going to top 0.1%: 40% - He argues income growth has been captured by a tiny elite. Households in the top 0.1%: 124,000 households - Size of the group receiving a disproportionate share of gains. Qualcomm repurchases (2009-2014): 238 million shares for $13.6 billion - Used to illustrate buybacks alongside rising diluted share count. Qualcomm share count change: 2% increase - Despite massive buybacks, total shares outstanding rose due to executive share grants. Corporate director nominations approved in 2012: 17,081 nominated; 61 not approved - Used to show how rarely boards face real accountability. Board reappointment rate: 94% - A sign of entrenched board self-perpetuation. Women among Fortune 500 CEOs: Less than 5% - Clifford notes the shortage of women in top executive roles. Women among directors: Less than 20% - Board diversity remains limited. Minorities among directors: 13% - Another indicator of limited board diversity. Management consulting industry size: $200 billion - Broad consulting industry size mentioned while criticizing compensation consultants. Annual CEO luxury-tax threshold proposed: Pay above $6 million taxed dollar-for-dollar - Clifford's proposed policy intervention to curb excessive compensation.

Pivotal Quotes: "This system's insane, and it's hurting a lot of people." — Stephen Clifford: His conclusion after researching compensation practices from the boardroom perspective. "It started with a peer group. ... Guys, companies choose peer groups that have highly paid CEOs. It's not an objective data set." — Stephen Clifford: Explaining how benchmarking inflates compensation through selective comparisons. "I would rather throw a viper down my shirt front than hire a compensation consultant." — Charlie Munger (quoted by Barry Ritholtz): Used to illustrate skepticism toward compensation consultants.

Implications: The discussion suggests CEO pay will keep rising unless boards face real outside pressure or regulation. For investors and workers, that means weaker long-term investment, more inequality, and continued misalignment between management incentives and company health.