Executive Compensation: Common Sense, Not Politics

There is no greater a critic of corporate abuse than yours truly. And by political standards, a somewhat left-of-center critic, at that.

But when it comes to CEO pay, it’s about common sense, not politics.

CEO pay, as outrageous as it may at times appear, is between a public company and its shareholders — not politicians who know a juicy topic when they see it.

If investors don’t like the compensation structure of a company, which is available in detail in the annual proxy and in sometimes hard-to-find employment contracts that are exhibits to SEC filings, they don’t have to buy the stock. It’s really that simple.

If they think the compensation structure is egregious, they can become active and kick out management and the board. It’s really that simple.

If they think shareholders should have more of a role, they can try to push the company the way of Apple (AAPL), Aflac (AFL) and many other companies, where “Say on Pay,” which puts shareholders in an advisory role, has become the new world order. (It’s not perfect, but it’s better than nothing. And it’s really that simple.)

So, here we have the Congressional Committee on Oversight and Government Reform, grilling current and former execs of Citigroup (C), Merrill Lynch (MER) or Countrywide (CFC) in a hearing on CEO Pay and its relationship to the mortgage mess.

What does CEO pay have to do with the mortgage mess? Zero. What does it have to do with politicians knowing a good hook when they see one? Everything.

Comments

[contrarian@coalmine]

Hey Herb,

What's really wrong with the government mandating salary caps or proposing formula's which limit the amount of money that top management can siphon from publicly traded companies? Can't we just agree that man, left on his own like a boy in an unattended candy shop, is greedy; and that that the "public" owners of these publicly traded companies, as opposed to their private enterprise counterparts, must be protected from unchecked greed? Why is this thought process always tossed away as be un-American, anti-Free Market, or worst. Why do intelligent people always hide behind the phrase "If investors don’t like the compensation structure of a company...they don’t have to buy the stock. It’s really that simple."

I've watched back-to-back CEO's abruptly removed from office (via death, illness, or misconduct) at McDonald's and Boeing without a pause in productivity, while their stocks performed extraordinarily afterwards. How important is a CEO at an established utility company, a cyclical industrial, or a huge service company? If all the electric utility company CEO's disappeared into a void tomorrow would the lights still come on in our homes? If salaries and bonuses at Wall Street's publicly traded companies were slashed across the board, would brokers,traders, and deal makers continue to get out of bed and go to work? I think so.

[Omaha-29]

"They don't have to buy the stock.Its that simple"???..Pleas... tell that to my index funds
If congress was serious then they could pass the law giving shareholders the power to control the CEO and his out of control board.

[Briggsy]

Until Congress mandates an open nomination process for corporate boards and establishes an effective way for shareholders to impose limits on self-perpetuating insiders, CEO pay is just one of a multitude abuses which will continue to embarrass American business.

[david levine]

Please, "don't buy the stocK" there is not much power investors have over the board of directors. Does the CEO account for the success of a company or do the workers also have a part in the companies success. If we want to remain a fair minded democarcy we need to keep the extemes of wealth and poverty to a minimum.

[deano]

If nothing else, the committee's review put some light on this problem, even though they have no power over it. The statement that the investor doesn't have to buy the stock is ludicrous. Some people have had stock for years and now you are telling them to just walk away. The compensation committees in these companies are just scratching the CEO's back, since they are all from the same mold.

[as]

While it is true that it is none of the governments business the protected state of a corporation with limited liability is a gift from the state. In other words the government has given corporations a special place that enables them to have limited liability. What this really means is that an investor wins or loses but is not liable for more than the investment. This privilege was provided in this country to enable corporations to exist so that projects like the Erie Canal could be built. These big projects needed a lot of money and an individual simply could not finance them. What we have now are corporations......char... by the state on the basis that they would help the state develop its economy.....shipping jobs overseas and doing labor arbitrage. Obviously, what corporations do is entirely within the realm of the responsibility of the state. Otherwise, let us convert them to general partnerships and let Angelo Mozilo, or Stan O'Neal, Nardelli and their ilk be responsible for the huge monetary losses.

[SeekingClarity]

We have to hand it to today's excutives in corporate America. They have successfully figured out a way to legally and openly rip off shareholders while assuring that the same shareholders will likely never take any action against them even though they are aware of the scam. It comes down to simple economics. Even though the excessive pay amouts are huge, they still typically amount to pennies or less per share of stock. So economically speaking, it will never be worth most shareholders' time and effort to go through all of the steps necessary to bring and end to the practice - particularly when those efforts to be repeated for each stock in their portfolio. 'Selling the stock' isn't really an effective strategy for investors in these kind of situations. Such actions will never have a direct impact on the board. And the stock price only needs to drop by a small amount before it will make sense for another investor to buy it as it may still provide a reasonable return despite the CEO's 'theft via compensation'. CEOs and boards count on this simple fact and it is the reason executive pay has been able to grow in such a runaway fashion. The only way to effectively address this situation is to apply economies of scale to shareholder efforts. One indirect way to do this would be to use a political process to have create compensation standards that would apply to all publicly traded companies. I'm confident that standards could be created that would still allow CEOs to get rich enough to avoid a flight of talent from the market. Unfortunately, this is unlikely to ever happen as executives and the lobbyists that they can afford to hire are quite effective in developing arguments that will easily dupe the typical voter/shareholder into believing that CEO pay is somehow justified. With regard to some of these arguments, I would make the following observations:

- Employee theft of merchandise is a constant problem for retail businesses. However, I don't often hear people make the argument that the theft should be ignored/tolerated in publicly traded companies since the shareholders can just choose to sell the stock if they don't like it. Eventhough merchandise theft is legally different from excessive CEO pay, morally and economically it is the equivalent.

- Many argue that impact of decisions made at the highest level of a company can have such a large impact on financial results that the people making those decisions should be paid commensurately. However, use of that kind of logic would lead one to believe that doctors, pilots, cab drivers, etc. should be able to charge 400 times their usual fee when they provide service to CEOs since their actions can potentially have a major impact on the CEOs ability to make future decisions (i.e. CEO can't perform as well if sick or injured in an accident). It would also lead one to conclude that the pay for Congressment, Senators, and the President should be on the order of billions of dollars per year.

- Generally speaking, people's pay tends to be a function of the unique skills they bring to the job and the difficulty in replacing such skills. Does anyone, including BODs and compensation consultants, REALLY believe that these people are so unique and gifted that they are worth 400 times more than the average employee? I'm certain that for evey highly-paid 'superstar' CEO their is a long line of very qualified and competent people that would be glad to take the job for significantly less money if given the opportunity. But most will never get the chance sine they aren't good friends of key board members. It's also very difficult to dispute the hiring and pay decisions of board members since the true relative performance of executives is very difficult if not impossible to determine.

- Who came up with the ludicrous idea that CEO pay should be based on the price of the company's stock? Stock prices are driven by many factors that have NOTHING to do with CEO actions (e.g. manic markets, excessive liquidity, group think, etc.). In the field of money management it's been common practice to evaluate a manager NOT on the return of his portfolio but rather on the excess of that return over a reasonable benchmark as measured over a long period of time. The idea is to ascertain the true value-added of the manager. I don't often hear about CEO pay packages that look at stock performance RELATIVE to the market as a whole or, better yet, an index of other companies in the same industry. Rather, it seems that when the market goes up they get rich and when the market goes down they get slightly less rich.

- The argument that CEO pay is effectively determined by free and open markets is laughable. Markets rarely work when the market participants (BODs) are all using other people's money to acquire/hire assets without any direct and easily implemented accountability to those 'other people'. Selling the stock doesn't make them accountable (see above). And it is my understanding that trends in coporate governance policy have made it increasingly difficult to unseat board members.

- What's up with this practice of changing compensation formulas when times get bad (see recent WSJ article on new bonus plan for WAMU management)? When the market is good these guys rake in a lot of money - often for no other reason than the fact that the market was good. Maybe they should then have to forgo a lot of money for no reason other than the fact the market is bad.