February 2, 2007
Boards Told to Rein In Executive Pay
Ultimately, it probably amounts to little more than pandering to the populace, but many politicians (Republicans and Democrats alike) are making noise about the need to rein in or at least increase the transparency of executive compensation packages.
The perceived need for some institutional control when it comes to compensation has become high profile news in the wake of cases where boards and CEOs “mutually agreed” the executives should exit quickly, being careful not to let the door hit them on the way out. Unfortunately, many shareholders in these companies soon found the separation was not so sweet as dismissed execs (Robert Nardelli comes quickly to mind) went out the door with a number of extravagant parting gifts.
In his reply to the State of the Union address given by President Bush, Sen. Jim Webb (D – VA) said, “When I graduated from college, the average corporate CEO made 20 times what the average worker did; today, it’s nearly 400 times. In other words, it takes the average worker more than a year to make the money that his or her boss makes in one day.”
Rep. Barney Frank (D – MA), who serves as the chair for the House Financial Services Committee, has made it known that he intends to introduce legislation that would require public companies to put executive pay up for a shareholder vote on an annual basis.
On Wednesday, President Bush delivered his State of the Economy speech at Federal Hall in New York. In his remarks, Mr. Bush, listed positive developments in the areas of economic growth, stock market gains, low inflation, jobs and wages.
The President said it was clear that business worked best when free market conditions prevailed. He also acknowledged that the rights of a free (market) society bring along corresponding responsibilities.
“A free and vibrant economy depends on public trust. Shareholders should know what executive compensation packages look like. I appreciate the fact that the SEC has issued new rules to ensure that there is transparency when it comes to executive pay packages,” he said. “The print ought to be big and understandable. When people analyze their investment, they ought to see loud and clear — they ought to be able to see with certainty the nature of the compensation packages for the people entrusted to run the companies in which they’ve got an investment.”
The President then added, “Government should not decide the compensation for America’s corporate executives, but the salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders. America’s corporate boardrooms must step up to their responsibilities.”
Discussion Question: Where do you stand on the need for transparency and/or limits on the compensation paid to executives in retailing and other industries?
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Gee, this free market idea sounds great…let’s try it!
Seriously though–and not to burst anyone’s bubble–this country’s economy is not now nor ever has been a true “free market:” pro athletes’ salaries are inflated by the subsidies received by the facilities where they play, industries are implicitly supported by imposing externalities on society, etc.; I doubt the ideal is even possible in the real world.
But to the extent that this issue is a problem, the solution seems simple: if you don’t like the way a company is run, sell your stock in it (or don’t but it in the first place).
The government should not get involved in how companies decide to compensate their employees. It’s bad enough that the government sets these ridiculous minimum wage mandates that have nothing to do with the free market on which our great country was founded. I doubt we will see any caps on executive pay because it’s these same executives that decide how much they will donate in political contributions. Politicians are not going to bite the hand that feeds them. If the American public is fed up with CEO’s making too much money then they should sell their stock in companies they feel are abusing the system and stop buying their products and services. Paying CEO’s based on performance restricts a company’s CEO selection to good business people instead of perhaps high profile people whose job it is to convince Wall Street that is Christmas every day at their company. Stock prices are not just based on profit and loss but smoke and mirrors. The sizzle sells the steak and it sometimes pays to spend a little extra on the sizzle than on the quality of the steak. Sometimes this backfires with companies like Home Depot and Albertsons. But just think of all the companies it is benefiting as well, which we never discuss.
As long as it remains a free market, anyone can earn as much as they can get away with. Period. You can argue that nobody is worth the kind of money some CEOs earn…until you look at the NBA, the American and National League, professional football, etc., etc. You can’t have it both ways–either you believe in truly free markets which allow some people to game the system or you believe in controlled economies. It’s a tad ironic to hear conservative Republicans calling for artificial caps on earnings, but then, it’s a strange world no matter how you slice it.
Corporate and personal greed never ceases when there are no corrective winds of limits and transparency to blow them away. But, as with most things in life, excesses eventually develop a crack. That’s what let’s the light in. And that’s what seems to be happening–at last. Meanwhile, the “kingly” rich putt away this winter on warm velvety golf greens pontificating in their self-initiated purity of the past.
At various times, the heads of Barnes & Noble, Costco, and Lechters took modest salaries. In each case, these people felt that their important compensation was growth in the stock price, since they had major share ownership. Compensation plans should be simple and transparent. When they aren’t, it’s a bad signal to employees and shareholders. The huge payments make the headlines, but transparency is the real issue.
“Gee, Wally. Aren’t some of the company board members that agree to such high compensation packages also key executives at their companies and stand to make more if the salary bar is raised at top companies? That’s right, Beav. They all must be drinking from the same cool aid pitcher when they vote on the CEO’s salary. Heck, that’s like lettin’ all his kids decide what the allowance amount should be. You bet we’d make it high. If that happens, maybe Lumpy could pay back that money he owes me.”
I suppose we may see general agreement that there is a problem with executive pay but little agreement on what to do about it. I believe I see hackles have been raised in this discussion, which may have to do with the idea of government trying to regulate how much a particular person makes (which, by the way, may not be the same thing as saying how much companies may pay a CEO).
In any case, we appear to have taken the same path we have taken numerous times, that of saying, “We have a problem in the business world that we haven’t been able to solve, so let’s have government fix it for us.” In all the cases I can think of, this solution has had undesirable and unintended consequences, and never really fixes the problem.
Why do we pay CEOs so much money? On the surface, the arguments go along the lines of, “In order to get the best talent, you have to pay what others are paying or a little more.” The assumption seems to be that the CEO determines, or at least is most responsible for, how the company performs. This may seem so obvious that to raise it may make some laugh.
But let’s look again. Why did Al Dunlap go from being a hero to a villain? How did Joe Nacchio go from being Qwest’s board’s first pick to being fired? Examples are everywhere of the possibility that the CEO is not just a puppeteer, but part of a powerful system that also controls him or her.
We seem to love heroes. We love sports stars, stories of spectacular rescues by fire fighters, stories of military sacrifice and success, rags-to-riches stories, and of course, “The Smart, Tough Business Leader Who Overcomes All Odds and Succeeds.” Dozens of books and articles are written every year about business heroes. I suspect that we need heroes because we may feel so helpless: wars on terror and on drugs and on guns and on cancer and on unsafe foods and on unsafe air. We have a war on practically everything because we are desperately afraid. Or is it the other way around? Heroes give us a glimpse into the child’s world of wonder and beauty we left when we were 12 or 5 or 2.
I don’t believe we can heal this sickness by worshiping CEOs, by paying them bazillions, by regulating their pay, or by complaining about either side of this issue.
It’s easy to pontificate about letting the “free market” rule. Who sets the compensation levels–CEOs (or former CEOs) of other companies who are often compensated for 6-10 days of “work” as Board Members at levels above the annual earnings of most of the employees at the company.
The buck should stop at the desk of the person running the shop and for taking that responsibility they deserve compensation greater than others in their organization–but not 400 times greater! I don’t attend professional sports for the very reason that I think the prima donnas playing them are ridiculously overpaid. Yes they have talent and abilities that I don’t but it does not make them worth what they are being paid. Apparently that has not had an impact on the salary cap.
If I’d owned a few thousand shares of Home Depot and sold them to protest compensation just how much impact would that have? About as much as spitting in the ocean. Yet if you asked 100 people if the compensation levels were acceptable 95 would tell you no.
I don’t like government interference in the market but regulation and transparency will at least allow people to know and become outraged. Unfortunately, the guy working 50 hours a week to keep a roof over his head and feed his family does not have much time to crusade against those inequities.
Capitalism and free markets created the wealth we’ve enjoyed since the industrial revolution. The system works fine for almost all except the few instances that are always brought to light, which by the way is a check and balance of itself.
That being said, compensation needs to be transparent–but government is never the answer. One could argue; does anybody complain and get upset for the investor when big movies flop, while actors go to the bank with tens of millions? Or how about “professionals,” for instance; what about the attorney who “helps” his “poor client” with a civil suit for being wronged and collect half or more of millions of dollars?
Free enterprise economies allow for profits and reward. Most executives’ pay is tied to stock options. But if the stock goes down, they get nothing…and yet I don’t see anyone too concerned for them–nor should they be.
I agree again that there needs to be disclosure but this has to come from within. What we (& the government) are doing here is pitting one class against another (creating a demonization or social disruption). Hmmmmmm, I believe Karl Marx would agree with that.
As it’s Friday, I’m peering out my window and seeing those lovely pink pigs flying past again. This time, they’re laughing about the idea of transparency in executive pay and honour amongst executives in how much they receive/demand for their services. I never have understood why or how there is any justification in either offering or accepting what often amount to obscene amounts of money. Competition is hardly a satisfactory answer–if a company doesn’t offer vast remuneration, said executive might take their services to a competitor, for better or for worse? Getting rid of a disastrous executive means resorting to bribery otherwise he/she will refuse to vacate the premises? I don’t altogether believe that getting shareholders to vote annually will make much difference to the transparency issue. In the UK there are far more institutional than individual investors. The former may, perhaps, be represented by members of the same club as the executive whose pay is being discussed. The latter, for all sorts of reasons, either don’t vote or exercise proxies which puts the decision making back into the same old hands. Perhaps Americans who invest far more regularly are also more inclined to play an active part in decision making but somehow I doubt that many would have sufficient knowledge to make an informed decision or power to achieve change. Having a free market economy in a democratic, capitalist society may be great on paper but doesn’t always work well in practice. There are far too many people whose priorities are their own bank accounts to ensure that businesses are run well (and ethically).
In the best of all possible worlds people would provide value for money with their performance and pay would be transparent. If they were not performing well they would not ask for or accept either big salaries, shares or pay offs. Government and even boards would not have to worry about regulating; there would be enough discussion and interaction to recognise who deserved what. Oops, I’ve just glanced out the window again and it seems that my pigs are crying rather than laughing.
It is a very slippery slope when government sets salary ranges for executives or any position for that matter. The medical world reimbursement system is a good example of a management process gone awry.
The market, shareholders and boards should set and allow compensation to move with the profitability and success of the venture, both up and DOWN. Having said that, I also agree that whatever the compensation is, should be as crystal clear and plain spoken as possible so that the shareholders and boards can easily adjust.
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Gee, this free market idea sounds great…let’s try it!
Seriously though–and not to burst anyone’s bubble–this country’s economy is not now nor ever has been a true “free market:” pro athletes’ salaries are inflated by the subsidies received by the facilities where they play, industries are implicitly supported by imposing externalities on society, etc.; I doubt the ideal is even possible in the real world.
But to the extent that this issue is a problem, the solution seems simple: if you don’t like the way a company is run, sell your stock in it (or don’t but it in the first place).
The government should not get involved in how companies decide to compensate their employees. It’s bad enough that the government sets these ridiculous minimum wage mandates that have nothing to do with the free market on which our great country was founded. I doubt we will see any caps on executive pay because it’s these same executives that decide how much they will donate in political contributions. Politicians are not going to bite the hand that feeds them. If the American public is fed up with CEO’s making too much money then they should sell their stock in companies they feel are abusing the system and stop buying their products and services. Paying CEO’s based on performance restricts a company’s CEO selection to good business people instead of perhaps high profile people whose job it is to convince Wall Street that is Christmas every day at their company. Stock prices are not just based on profit and loss but smoke and mirrors. The sizzle sells the steak and it sometimes pays to spend a little extra on the sizzle than on the quality of the steak. Sometimes this backfires with companies like Home Depot and Albertsons. But just think of all the companies it is benefiting as well, which we never discuss.
As long as it remains a free market, anyone can earn as much as they can get away with. Period. You can argue that nobody is worth the kind of money some CEOs earn…until you look at the NBA, the American and National League, professional football, etc., etc. You can’t have it both ways–either you believe in truly free markets which allow some people to game the system or you believe in controlled economies. It’s a tad ironic to hear conservative Republicans calling for artificial caps on earnings, but then, it’s a strange world no matter how you slice it.
Corporate and personal greed never ceases when there are no corrective winds of limits and transparency to blow them away. But, as with most things in life, excesses eventually develop a crack. That’s what let’s the light in. And that’s what seems to be happening–at last. Meanwhile, the “kingly” rich putt away this winter on warm velvety golf greens pontificating in their self-initiated purity of the past.
At various times, the heads of Barnes & Noble, Costco, and Lechters took modest salaries. In each case, these people felt that their important compensation was growth in the stock price, since they had major share ownership. Compensation plans should be simple and transparent. When they aren’t, it’s a bad signal to employees and shareholders. The huge payments make the headlines, but transparency is the real issue.
“Gee, Wally. Aren’t some of the company board members that agree to such high compensation packages also key executives at their companies and stand to make more if the salary bar is raised at top companies? That’s right, Beav. They all must be drinking from the same cool aid pitcher when they vote on the CEO’s salary. Heck, that’s like lettin’ all his kids decide what the allowance amount should be. You bet we’d make it high. If that happens, maybe Lumpy could pay back that money he owes me.”
I suppose we may see general agreement that there is a problem with executive pay but little agreement on what to do about it. I believe I see hackles have been raised in this discussion, which may have to do with the idea of government trying to regulate how much a particular person makes (which, by the way, may not be the same thing as saying how much companies may pay a CEO).
In any case, we appear to have taken the same path we have taken numerous times, that of saying, “We have a problem in the business world that we haven’t been able to solve, so let’s have government fix it for us.” In all the cases I can think of, this solution has had undesirable and unintended consequences, and never really fixes the problem.
Why do we pay CEOs so much money? On the surface, the arguments go along the lines of, “In order to get the best talent, you have to pay what others are paying or a little more.” The assumption seems to be that the CEO determines, or at least is most responsible for, how the company performs. This may seem so obvious that to raise it may make some laugh.
But let’s look again. Why did Al Dunlap go from being a hero to a villain? How did Joe Nacchio go from being Qwest’s board’s first pick to being fired? Examples are everywhere of the possibility that the CEO is not just a puppeteer, but part of a powerful system that also controls him or her.
We seem to love heroes. We love sports stars, stories of spectacular rescues by fire fighters, stories of military sacrifice and success, rags-to-riches stories, and of course, “The Smart, Tough Business Leader Who Overcomes All Odds and Succeeds.” Dozens of books and articles are written every year about business heroes. I suspect that we need heroes because we may feel so helpless: wars on terror and on drugs and on guns and on cancer and on unsafe foods and on unsafe air. We have a war on practically everything because we are desperately afraid. Or is it the other way around? Heroes give us a glimpse into the child’s world of wonder and beauty we left when we were 12 or 5 or 2.
I don’t believe we can heal this sickness by worshiping CEOs, by paying them bazillions, by regulating their pay, or by complaining about either side of this issue.
It’s easy to pontificate about letting the “free market” rule. Who sets the compensation levels–CEOs (or former CEOs) of other companies who are often compensated for 6-10 days of “work” as Board Members at levels above the annual earnings of most of the employees at the company.
The buck should stop at the desk of the person running the shop and for taking that responsibility they deserve compensation greater than others in their organization–but not 400 times greater! I don’t attend professional sports for the very reason that I think the prima donnas playing them are ridiculously overpaid. Yes they have talent and abilities that I don’t but it does not make them worth what they are being paid. Apparently that has not had an impact on the salary cap.
If I’d owned a few thousand shares of Home Depot and sold them to protest compensation just how much impact would that have? About as much as spitting in the ocean. Yet if you asked 100 people if the compensation levels were acceptable 95 would tell you no.
I don’t like government interference in the market but regulation and transparency will at least allow people to know and become outraged. Unfortunately, the guy working 50 hours a week to keep a roof over his head and feed his family does not have much time to crusade against those inequities.
Capitalism and free markets created the wealth we’ve enjoyed since the industrial revolution. The system works fine for almost all except the few instances that are always brought to light, which by the way is a check and balance of itself.
That being said, compensation needs to be transparent–but government is never the answer. One could argue; does anybody complain and get upset for the investor when big movies flop, while actors go to the bank with tens of millions? Or how about “professionals,” for instance; what about the attorney who “helps” his “poor client” with a civil suit for being wronged and collect half or more of millions of dollars?
Free enterprise economies allow for profits and reward. Most executives’ pay is tied to stock options. But if the stock goes down, they get nothing…and yet I don’t see anyone too concerned for them–nor should they be.
I agree again that there needs to be disclosure but this has to come from within. What we (& the government) are doing here is pitting one class against another (creating a demonization or social disruption). Hmmmmmm, I believe Karl Marx would agree with that.
As it’s Friday, I’m peering out my window and seeing those lovely pink pigs flying past again. This time, they’re laughing about the idea of transparency in executive pay and honour amongst executives in how much they receive/demand for their services. I never have understood why or how there is any justification in either offering or accepting what often amount to obscene amounts of money. Competition is hardly a satisfactory answer–if a company doesn’t offer vast remuneration, said executive might take their services to a competitor, for better or for worse? Getting rid of a disastrous executive means resorting to bribery otherwise he/she will refuse to vacate the premises? I don’t altogether believe that getting shareholders to vote annually will make much difference to the transparency issue. In the UK there are far more institutional than individual investors. The former may, perhaps, be represented by members of the same club as the executive whose pay is being discussed. The latter, for all sorts of reasons, either don’t vote or exercise proxies which puts the decision making back into the same old hands. Perhaps Americans who invest far more regularly are also more inclined to play an active part in decision making but somehow I doubt that many would have sufficient knowledge to make an informed decision or power to achieve change. Having a free market economy in a democratic, capitalist society may be great on paper but doesn’t always work well in practice. There are far too many people whose priorities are their own bank accounts to ensure that businesses are run well (and ethically).
In the best of all possible worlds people would provide value for money with their performance and pay would be transparent. If they were not performing well they would not ask for or accept either big salaries, shares or pay offs. Government and even boards would not have to worry about regulating; there would be enough discussion and interaction to recognise who deserved what. Oops, I’ve just glanced out the window again and it seems that my pigs are crying rather than laughing.
It is a very slippery slope when government sets salary ranges for executives or any position for that matter. The medical world reimbursement system is a good example of a management process gone awry.
The market, shareholders and boards should set and allow compensation to move with the profitability and success of the venture, both up and DOWN. Having said that, I also agree that whatever the compensation is, should be as crystal clear and plain spoken as possible so that the shareholders and boards can easily adjust.