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April 8, 2009 Forum Report:

Inviting Comments on O達yrne Analysis of Pay Correlation



Forum Report

Inviting Comments on O達yrne Analysis of Pay Correlation

Following discussions stimulated by the econometric studies of executive compensation he presented in a recent program at the New York Society of Security Analysts (NYSSA), I invited Stephen F. O達yrne of Shareholder Value Advisors, Inc., to provide Forum participants with a summary of his observations.  The following slides are intended to introduce his analyses of how executive compensation actually relates to corporate and marketplace conditions:

    April 7, 2009, Stephen F. O達yrne: 鉄ix Factors That Explain Executive Pay (17 pages, 195 KB, in PDF format)

The professional rigor of Mr. O達yrne痴 analysis is an important foundation for addressing compensation issues, especially now that a broader range of decision-makers is becoming involved in the determination of corporate practices.  Consider, for example, the support his quantitative analysis provides for these observations that many of us have been discussing:

  1. Stock price is not the same thing as business performance.  Even advocates of efficient market theory recognize the lack of correlation between the two over periods of less than a decade or more.  Offering 菟erformance incentives related to short-term market valuations of a company痴 stock is simply paying the executive to pump the stock rather than to build a sustainable business.
  2. It costs more to pay executives for risks they don稚 control.  Anyone with common sense will want a promise of more money if he thinks there痴 a higher risk of payment.  If someone is better at managing a business operation than at managing stock prices, the promise of a payment based on future stock price will be viewed as less controllable and therefore higher risk.

Putting these observations together, you could assume that the 1990s theory of 殿lignment by paying executives with stock options would result in significantly higher compensation than the previous emphasis on relatively predictable cash payments.  Mr. O達yrne presents the econometric evidence of that result in this graph (page 9):

Your comments will be welcomed, on Mr. O達yrne痴 work as well as on the issues to be addressed.


GL April 8, 2009


Gary Lutin

Lutin & Company

575 Madison Avenue, 10th Floor

New York, New York 10022

Tel: 212-605-0335






This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was supported by Sibson Consulting to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of performance leadership relating to the issues being addressed.

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