Michael Spence, who shared the Nobel Prize in economics this year, has shown he isn't the sort of academic who takes refuge in the ivory tower.
The former dean of Stanford University's business school, Spence is a partner in a venture-capital firm, sits on 10 or so corporate boards and on four of their compensation committees.
Spence was one of three economists honored for pioneering work on "asymmetric information" -- research into what happens when some people have more information than others.
Spence's fellow laureate George Akerlof of the University of California at Berkeley explained years ago that because sellers of used cars are known to have inside information, they must give warranties to reassure wary consumers they aren't buying lemons.
On his part, the 58-year-old Spence "explored how people with inside knowledge of a technology company's financial prospects gain an edge over other investors, while people who don't fully understand a company's finances may invest unwisely," said Stanford's press release of his Nobel work.
Ironically, Spence's service on compensation committees seems to show how the real insiders -- the chief executives -- manage the "asymmetric information" equation so that even board members may be at their mercy.
When I contacted him by e-mail, Spence said he was "not comfortable" discussing specific compensation issues and committees at particular companies.
"I believe that the approach to compensation as well as the specifics are laid out clearly in proxy statements and other public documents," he said.
Proxy statements might seem clear to learned professors -- perhaps in comparison to all those student papers they wade through -- but I have found over the years that proxies mislead and obfuscate as much as they illuminate.
Consider examples from Spence's compensation committees offered by Nike Inc, General Mills Inc and Siebel Systems Inc.
In Nike's proxy, the compensation committee simply states that chief executive officer Philip Knight "received no stock option awards" -- but doesn't tell shareholders much more. In fact Knight took a pay cut, to US$2.6 million from US$3.5 million, and his bonus was halved, with no explanation given.
Knight doesn't take stock options and the rest of his pay package doesn't make up for that. To me, his total pay seems well below the market for a company Nike's size.
The General Mills proxy says its compensation committee's "targeted level of stock option grants ranks above the median range" of grants made by similar companies. That's putting it mildly.
CEO Stephen Sanger of General Mills, with total pay of US$14.8 million, was the most relatively overpaid in my recent survey of 38 consumer products companies. And the present value of his options was 47 percent higher than the second-highest CEO.
Then there is Tom Siebel. He adores stock options and his grants bear little relation to the rewards his shareholders receive.
In 1998, he received options on US$63 million of stock and Siebel Systems delivered shareholders a 62.3 percent return. In 2000, Siebel received options on US$401 million of stock -- 6.3 times that of 1998 -- while the return to shareholders was virtually the same at 61 percent.
Among other things, Siebel System's compensation committee said the options aimed to "maintain the overall competitiveness of Mr. Siebel's compensation package" in 2000.
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