What are Your Thoughts on Executive Compensation?

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executive compensation.jpgMatt Stoller, policy adviser to Representative Alan Grayson (D-FL-8), who is great on just about everything except the Middle East and Cuba — which I hope to nudge him on a bit one of these days — just sent me this request:

Next week, the Financial Services Committee is going to be marking up a bill on executive compensation, the so-called ‘Say on Pay’ bill. Among other things, this bill mandates a nonbinding shareholder vote on executive compensation. Now, the vote is nonbinding, so the board could theoretically just ignore a shareholder ‘no’ vote.
Let’s say that the legislation were changed so that the shareholder vote were binding. What would happen if shareholders vote ‘no’? Would the executives then be paid nothing? That seems unreasonable and unworkable.
How could this be structured so that the shareholder vote is binding, but there’s some process to determine executive pay if management is voted down?

I am posting this for public comment here. Congressman Grayson will review the serious comments made.
I am also going to ask Leo Hindery, a CEO who has long been talking about the need to get executive compensation under control in this country, to consider posting a comment as well.
HIndery happens to be speaking along with Economic Strategy Institute President Clyde Prestowitz, Manufacturing and Technology News publisher Richard McCormack, and Alliance for American Manufacturing Executive Director Scott Paul at a New America Foundation forum titled “Manufacturing a Better Future for America” on Tuesday, 28 July, 12:15 – 1:45 pm EST. The event will stream live here at The Washington Note.
My own view is that controlling or constraining executive compensation requires a delicate fix — and I’m not sure one exists. I think that creating accountable boards and accountable committee structures that do have sensitivity to stockholders is healthy — but I agree with Stoller that binary votes by shareholders on executive compensation could produce unworkable logjams that produce outcomes more akin to command economies than market economies.
I look forward to reading your comments.
— Steve Clemons

Comments

17 comments on “What are Your Thoughts on Executive Compensation?

  1. adwokat wypadek says:

    very interesting article

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  2. PrahaPartizan says:

    I’ve often thought that part of the problem associated with the high compensation executives receive is the moral hazard they face when deciding to eliminate part of the stakeholder base in their enterprise in an effort to garner more personal compensation. The executives get a bigger bonus by economically killing their own employees. We know the boards exercise little control, so the executives can just fire away.
    Total focus on shareholders’ rights has killed American corporations. Only by bringing stakeholders’ rights into the picture do we stand a chance of righting this ship. Perhaps one way would be to require all corporations to have a provision which denies any bonus to executives of any corporation (public or otherwise) if the number of terminated employees exceeds some base level expected in a normal year. The executives are paid to anticipate changes in the future, not just the here and now. If the executives have hired too many employees because of bad judgment and stolen their time and alternatives, the executives should be made to pay for their bad judgment by losing their bonuses. Under current procedures, the executives reap the upside and avoid the downside of their own bad judgment. That needs to end.

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  3. w czander says:

    The real problem is the growing gap between the rich and the rest of us. Since 1919, the wage gap between the top one percent and the workforce basically remained stable. However, in the early 1980’s the gap between this richest one percent and the rest of the workforce significantly widened.
    The disparities between rich and middle and poor, ballooned accordingly. In 1979, the top 1 percent averaged 8 times more than middle-income families and 23 times more than the poorest 20 percent. By 2005, this top 1 percent grew to 21 times the income of middle-income families and 70 times the average income of the poorest 20 percent.
    In the past 25 years the definition of what is wealth has undergone a significant change. In 1982, the first year of the Forbes wealthiest 400 list, it took about $159 million in today’s dollars to make the list; in 2008, the minimum amount of wealth needed to make the list was $1.3 billion, (Arango & Creswell, 2008).
    This meant that during this quarter-century, the average income of the top layer more than tripled, rising 228 percent from $319,000 to $1.1 million. During the same period, the average income of the poorest fifth grew only 6 percent and the average income of the middle fifth grew 21 percent, less than one percent a year. In recent years this gap has been growing at a faster pace, for example from 2003 to 2005, the average household in the top one percent enjoyed an increase of $465,700 in annual income; while the average household in the bottom 20 percent saw an increase of only $200, and those in the middle fifth saw a rise of just $2,400.
    A Congressional Budget Office report (World Press.com, 2007) provided other metrics for gauging the staggering growth of economic inequality. The total 2005 income of the top three million Americans was equivalent to the total income of the bottom 166 million.

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  4. WigWag says:

    I would like to add one other point about marginal tax rates and executive compensation. During the election campaign, then Senator Obama made a comment designed to criticize Hillary Clinton. He pointed out that Ronald Reagan had been a transformative president while Bill Clinton had not been.
    One of the ways that Reagan “transformed” the United States (for the worse) was by making any contemplation of increasing marginal tax rates political poison.
    We see the results of this today where any consideration of raising rates on the wealthy is greeted by Republicans and Blue Dog Democrats as “dead on arrival.” This reality is currently being played out with the Senate Finance Committee refusing to even entertain the possibility of raising these rates on the wealthiest Americans to pay for health care reform.
    If Obama wants to be a “transformative” President in the way that he said Reagan was and Clinton wasn’t, he needs to move American political culture back in the direction of Franklin Roosevelt. He needs to make taxing the rich at appropriate (and significantly higher levels) politically feasible again.

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  5. Danton says:

    Such outrageously high levels of compensation we’ve seen over the last 15 to 20 years or so seem to me to undermine if not destroy any sort of work ethic. If you can earn $20 to $40 million in two to three years, you really do not need to pay much attention to the corporation over which you preside. How many times over the last two years have we heard a CEO or CFO proclaim, “I wasn’t aware this was happening”?
    As a side note, I think Jack Welch acted as a sadist at GE. I don’t mean that metaphorically.

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  6. Franklin says:

    Echoing some of the other comments:
    The greatest emphasis should be put on the independence of the corporate boards themselves.
    If the boards are independent – and the board members interests are most closely aligned with those of the shareholders themselves – then odds are that they will compensate the executives appropriately. If the boards are not independent, then there will be problems.
    At the end of the day, if shareholders are really upset, they can offer a no-confidence vote by dumping shares (just as the CEO can always walk). A non-binding vote at least can send a warning signal to the BoD and the CEO that all is not well – and it might temper excess.
    More broadly I agree with the comments regarding taxation – especially as it relates to things like capital gains.

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  7. Dennis Byron says:

    Even the fact that a Congressperson is asking such a question shows how stupid it is to have the government involved in this. What does he think: that CEOs punch a clock? No executive would ever start without a contract. If the contract is not approved by the shareholders, the person doesn’t start. Or if the shareholders do not renew a contract, the assignment is terminated. Of course, while American companies are tied up in such government bureacracy, even the stodgy EU will start running circles around us.

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  8. paul says:

    What jdledell said. Restoring high marginal income tax rates for very high incomes would be a very good solution to consider — notice that executive compensation really takes off after Reagan killed the concept of high marginal rates in 1981. If a CEO knows that everything he gets over, say, $50 million per year will be taxed at 90%, he may decide that, rather than his company paying a huge check to the IRS, he’d rather his company’s money goes to other things.

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  9. readerOfTeaLeaves says:

    WigWag has great recommendations.
    Also, this interview has terrific stats and excellent guests,
    including Les Leopold and Nomi Prins (and William Black) who
    know a great deal about how ‘exec pay’ has sabotaged the
    larger economy. http://lauraflanders.firedoglake.com/2009/06/23/will-obama-
    regulate-wall-street/
    If you are a ‘share holder’ that means you are a part owner.
    If you are a part owner, you are supposed to have input.
    If your vote doesn’t mean anything, you don’t have input.
    To mean something, your vote has to affect the outcome.
    With that said, there may be situations where the shareholders
    don’t have 100% veto power, but may set an acceptable range,
    or other constraints on board conduct.
    Fundamentally, until the time horizons for assessing exec pay
    are longer than we currently use (quarterly, annually), there will
    continue to be problems. And boards tend to get sucked into
    that myopic view. Building a company and establishing
    relationships requires time, and that’s one thing that has
    disappeared from too many economic transactions in a short-
    term, profit-taking, Wall Street frenzied world.

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  10. Bill says:

    In one of the earlier earnings announcements, not the last few weeks. One of the big financial institutions that we bailed out had profits of about 10B. The guidance, and the watchers, were expecting them to net about 40B for the year. However, it is really kind of a phony. They will gross about 100B, have apparent profits of 40B. Executive compensation will be based on the 40B number. However, they have a screwy way of dealing with setting aside money for losses. They still have lots of toxic stuff one their books, and need to set profits aside. They are going to set aside 9B per quarter, of 36B total for the year. Now really, their profits are not 40B for the year, they are 4B for the year. What kind of accounting rules are these? I am fine with basing the executive compensation formula on 4B, but not ten times that, or 40B for the year. We don’t need this kind of financial innovation.

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  11. hochi says:

    Take things as they come.

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  12. non-hater says:

    I’d like to see a majority of seats on corporate boards be selected by someone other than management. Focusing just on executive pay misses the larger issue of the lack of independence among directors.

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  13. WigWag says:

    Three thoughts come to mind:
    1) Shareholder votes on executive compensation (even non-binding votes) would be less necessary if corporate boards were more accountable to shareholders. As it is now, far too many Boards are made up of luminaries more devoted to management than shareholders. Some steps that could be taken include limiting the number of boards of publicly traded corporations a person can serve on; requiring representation for all stakeholders including labor and consumers and empowering nominating and compensation committees to be even more independent than they already are.
    2) Executive compensation would be less of an issue if the tax code were more progressive. If tax rates were raised on ultra-highly compensated executives to the levels that existed pre-Reagan, high compensation levels would be less offensive. How about a marginal rate of 70 percent for all compensation over $5 million per annum? At the very least, social security taxes should be levied on 100 percent of earned income.
    3) Obscene levels of compensation are a particular problem in the financial industry where recent events prove that “reward” is privatized while “risk” is socialized. The idea of a silicon valley entrepreneur making hundreds of millions of dollars for a new idea or product is far less offensive than a wall street (or Greenwich CT) hedge fund manager making tens or hundreds of millions for creating financial instruments that ultimately benefit no one but them, or for encouraging mergers and/or acquisitions that result in the loss of good, high paying jobs. Tax benefits that treat compensation to hedge fund managers in a more attractive manner than ordinary income also need to be revoked

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  14. jdledell says:

    Trying to regulate Executive Compensation is a fool’s game. There will always be loopholes and ways around any restrictions. The way to handle it by using the tax system. If the tax system makes it less enticing to receive excessive compensation that should dampen (but not eliminate) the issue.
    For example, now the top tax rate is 35% on income more than $373,000/year. What I envision is to put in more gradations in the upper limits. Perhaps, 37% over $500,000, 39% over $1 million, 43% over $2 million, 47% over $3 million, 50% over $4 million, etc up to 90% on over $100 million. Remember as late as 1964 the top bracket was 91% and what I am proposing would only reach that level with stratospheric compensation.
    Last but not least all income should be taxed at the same rates – short and long term capital gains, municipal bonds, etc etc. I would advocate lower FIT brackets to compensate for the extra income produced by standardizing income sources.

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  15. Rob says:

    The large wage gap in the US contributes to the increasingly American belief in a wealth transfer society. The WSJ just reported that 1/3 of all pay in the US now goes to executive compensation. Rather than work harder (because the implied message is that gets you nowhere), people look more and more to get rich quick schemes like casino gambling, state-run lotteries, and, recently, real estate. How to bring executive compensation back down to the human level? I think that more studies like the one in the WSJ will do more harm than good. Maybe an independent watchdog, akin to an OMB Watch for large corporations that ties executive compensation to a larger societal scorecard. We have something similar in the social ratings for health care products published by The Good Guide.

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  16. ... says:

    executive comp can often involve that ponzi scheme known to the western world as the stock market as well… getting that under control is going to be difficult.. these same folks are always wanting to or have gunned the system in the past for their own benefit, while the lowly peon stakeholders take the hit… aig, enron, worldcom… too many examples of where the whole idea is clearly based on bs and corruption..

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  17. ... says:

    executive comp is way out of line… it belongs to the same mindset of king/queen who gets everything, and the rest of who are too lowly and undeserving to get anything the same… it feeds right into rogue capitalism which is what the usa has really taken to a fine art as well….it’s for those who like excess………………………hummer america..

    Reply

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