A reply from the author.

• Author: Kaback, Hoffer
• Position: Response to articles by Abraham Zalesnik, Robert Stobaugh, Charles M. Elson, James E. Marley, Barbara Hackman Franklin, Richard H. Koppes, Leslie Levy and Robert Salwen in this issue; pp. 30, 33, 34, 36, 37, 38, 41

Proponents of Alignment emphasize the character of compensation. I emphasize the character of the director. My original article did not so much affirmatively urge cash compensation as demonstrate that the current obsession with Alignment is misguided. For Hamlet, "the readiness is all"; for corporate directors, it is character and judgment - not the form of compensation - that should be "all."

Prof. Elson asserts that (a) in order to "incentivize" outside directors to fulfill their obligations, they "must" become substantial shareholders, and (b) stock compensation will "energize previously passive boards" and "create effective oversight and performance." These pronouncements reflect Alignment advocates' conviction that the form of director compensation will induce superior director performance, a proposition I believe - and Prof. Zaleznik and Robert Salwen appear to agree - to be inherently illogical.

Professors Elson and Stobaugh place great weight on "studies." Prof. Elson claims that such studies reveal a "causal link" between director stock compensation/stock ownership (Stock Comp/Stock Own) and good board performance. Yet his claim is inconsistent with:

* The NACD Report's admission that the statistical evidence "stops short of proving cause and effect";

* Prof. Stobaugh's admission six months ago in this same magazine that the "anecdotal, statistical, and intuitive" claims for Stock Comp/Stock Own are "highly controversial and the evidence is not fully conclusive" ("Best Practices in Director Pay," DIRECTORS & BOARDS, Fall 1995); and,

* Prof. Elson's own recent admission that "there is no clear answer" to whether Stock Own leads to better company performance ("How Should Corporate Directors Be Compensated," DIRECTORS & BOARDS Special Report Number One, 1996). Moreover, in his present rejoinder to my original article, Prof. Stobaugh reveals the numerous shortcomings of the very studies upon which, simultaneously, he and Prof. Elson place so much reliance.

Other researchers (not mentioned by Professors Elson and Stobaugh) have concluded that director compensation programs have little or no relation to corporate performance. Graef Crystal has stated that "I've found in repeated studies that paying people in stock doesn't seem to make any difference" ("Are Directors Overpaid?," CFO magazine, February 1996). Separately, a recent study concludes that board/management ownership of a substantial amount of stock inhibits risk-taking that...