Taming Executive Pay Will Be up to Shareholders
New rules will apply to all public companies, not just banks.
By Renuka Rayasam, Associate Editor, The Kiplinger Letter
June 3, 2009
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Both Congress and federal securities regulators want to crimp executive pay. Odds are they will empower shareholders to do the job. Democratic Senators Charles Schumer (NY) and Maria Cantwell (WA) have introduced a shareholders' bill of rights, which lawmakers are now debating. Among other moves, it requires a nonbinding advisory vote on pay packages for top executives, similar to what's in place in the United Kingdom.
"The good thing with leaving it up to shareholders is that they can devise something that works for the individual circumstance of the company," says Alex Edmans, assistant professor of finance at the Wharton School of the University of Pennsylvania.
The proposed law would subject pay packages to public scrutiny and act as a moderating force to avoid an embarrassing "no" from shareholders. "It gives shareholders the tools to hold executives' feet to the fire," says Amy Borrus, deputy director at the Council of Institutional Investors.
The Securities and Exchange Commission is moving in the same direction, though the U.S. Chamber of Commerce and other business groups are preparing lawsuits, saying the agency doesn't have the authority to make such moves without congressional authority.
Boards are already moving toward giving executives higher base pay but lower bonuses. UBS recently raised base pay for some employees about 20% to 30%. New rules will keep those changes in place, even after the economy improves. Also, stock options will have longer vesting periods and be more closely tied to company profits or other performance metrics.
"While everyone wants pay for performance, they have also got to accept that someone is going to get paid a lot when the company does well," points out David Lynn of the Corporate Counsel, which advises companies on corporate governance issues.
The new rules will apply to all public companies, not just banks and insurers, though it was mainly compensation at those firms that sparked public outcry. "It's the scandals that ramped up concerns about bonuses," says Lynn. For example, Citigroup CEO Vikram S. Pandit earned $38.2 million in 2008, even as the company took $45 billion from taxpayers to stay afloat.
Lawmakers won't try to cap pay, though. They know that would likely go too far, driving the most talented executives abroad and making it tough to recruit CEOs. "The whole reason why the U.S. economy has been so successful is that if you create a lot of value to society, you get rewarded for it," says Edmans.
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Reader Comments (2)
Posted by: kenneth at 06/05/2009 12:48:38 PM
Executive pay is an unfunny joke. The Boards of Directors, who usually have been hand-picked by management (and are grossly over-paid themselves for a few days work per year), go to ridiculous extremes to justify the pay packages given to the top executives. For, example, the annual Notice to Stockholders usually contain 20 or more small-print pages explaining/justifying executive compensation, undoubtedly written by some highly-paid lawyers. And, since the stockholders are fragmented, with large holdings in the hands of pension plans, management itself (as in the case of Comcast), or other large holders (who often have a vested interest in current management), there is little chance that small stockholders will ever have significant influence in determining exec compensation. Several years ago, Congress limited the tax deductibility of compensation to $1M per year unless the excess was tied to attaining or exceeding performance goals (regarding revenue, income, etc. or growth.) That only brought on the clever lawyers, who devised goals which a blind man could easily attain or exceed. The solution is to limit pay (perhaps to $1M per year), period--with no exceptions. The fear that skilled executives would flee to foreign countries is a false one. Even if true, let them go--there is plenty of talent remaining here in the USA. Finally, most stellar results are attained, not because of the particular skill or expertise of the executives, but by extraneous forces, such as momentum, inflation, the overall economy, luck, political influence, etc.
Posted by: Elaine Pascoe at 06/05/2009 05:36:51 PM
Well, what an interesting idea! However, I have been attending stockholder meetings to make CEO's accountable for their decisions and pay. Guess what? There are very few stockholders attending meetings. The last I attended on May 21st and about 10 people, if that attending the meeting. I asked the CEO many tough questions, and when it came time to answer the question about executive pay, he completely avoided the question. The other shock was at the stockholder meetings I attend, I am the only person asking questions. Therein lies the problem!