When a rising stock price can hide trouble in the company

[NEW YORK] When a company receives criticism about its executive pay practices, a typical defence is to cite a rising stock price as justification of its pay. If total shareholder return is up, the theory goes, stockholders have no right to complain about what might otherwise look like outsize pay at their companies.

While this pay posture is understandable, it raises a question: should a rising stock price inoculate top executives from criticism over their pay? To more and more experts in corporate finance and pay issues, the answer is no.

Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, is among those who think that too many companies rely too heavily on the performance of their shares when computing executive compensation. "I'm a great believer in markets, but sometimes we need more attention paid to what did this management do to the value of the company and less to what did this management do to the price of the stock," he said. "I would like to see compensation systems where managers are rewarded based on what kind of projects they are working on and how big their returns on invested capital are." Yet, the focus on stock price appreciation as a benchmark for corporate performance and executive pay lives on. Firms still rely heavily on it, and so do the powerful proxy advisory services that suggest how shareholders should vote on pay practices and director elections.