Harry Campbell
Executive pay continues to skyrocket despite years of criticism by corporate governance gurus, fierce efforts by unions to temper compensation and calls by politicians to regulate pay.
Given these failures, perhaps it is time to ask whether critics’ actions have actually driven executive pay higher.
The Dodd-Frank financial regulatory overhaul was supposed to be a victory for those who deplore high executive pay when it is not justified by company performance. The law tries to provide shareholders with more input by requiring that public companies hold “say on pay” votes. These votes are nonbinding, but they allow shareholders to express an opinion on compensation policies.
The rule comes after years of efforts by the Securities and Exchange Commission to regulate executive compensation. The S.E.C.’s most robust move occurred in 2006, when the agency mandated rigorous disclosure of compensation, including perks like free country club memberships. A company can now fill 10 to 20 pages in its annual proxy statement detailing executive pay.
These are all well-intentioned efforts to end unjustified, egregious compensation packages and ensure that they do not lead to excessive risk-taking.
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But evidence of success is scant. According to the research firm Equilar, the median compensation for chief executives at 200 large companies was $10.8 million in 2010. This was a 26 percent increase from the previous year, which was preceded by a rare decline in 2008.
Still, the Standard Poor’s ExecuComp database shows that executive pay rose about 300 percent from 1992 to 2007. This compares with growth in the same period of about 14 percent in the inflation-adjusted real wages of college graduates, according to the Economic Policy Institute.
The latest “say on pay” endeavor has turned into a costly exercise that validates almost every companies’ pay practices. FactSet Sharkrepellent found that through June 30 of this proxy season, shareholders rejected pay plans in only 39 out of 2,502 companies, including well-known companies like Talbots, Hewlett-Packard and Stanley Black Decker.
Still, this is a 98.5 percent approval rate. I’m sorry, but I’m a bit cynical that 98.5 percent of any group is doing the right thing.
Justice Louis D. Brandeis famously wrote, “Sunlight is the best disinfectant.” But for compensation, it has had a perverse effect.
Chief executives tend to view themselves as residents of Lake Wobegon, where all children are above average. Disclosure gives them an arsenal to make perception reality. The compensation details of their counterparts provides them with the leverage to request a higher amount from boards. The result: each year executive pay rises ever higher and the industry average is reset.
Meanwhile, there has been a major movement to ensure that boards appropriately set compensation, with independent directors tasked with the job. Yet even these independent board members are often not in an effective position to push back forcefully. The chief executive runs the company. And a few extra million dollars is often not worth debating when much more is at stake in terms of profits. It doesn’t help their objectivity that independent directors may be using the same strategy to increase their salaries at their own full-time jobs.
Instead, compensation becomes a process-driven exercise in which the way it is paid — in cash, options or restricted stock — is most important. The final arbiter then becomes yet more costly pay consultants who rely on the same disclosures to determine excessive compensation.
As owners, shareholders should be the parties with the most interest, but the evidence does not bear this out. It takes time, money and research to effectively monitor executive compensation. For a big institutional shareholder that owns only 1 or 2 percent of a company, the economics just don’t make sense.
Instead, pensions, money managers and the like subscribe to Institutional Shareholder Services and other proxy advisory services. But the firms often focus on the structure of compensation and how tied it is to performance, not the absolute amount.
Even then, I.S.S. recommended in this proxy season that shareholders vote no on compensation at only about 12.7 percent of Russell 3000 companies, a recommendation that appears to have been mostly ignored. As of June 30, shareholders have refused to follow 90 percent of I.S.S. recommendations to vote no.
The consequence is that shareholders with a say on pay are validating spiraling executive compensation at significant cost to public companies.
This is not to say things are all bad. There appears to be some give and take on approving pay. Some companies have revised their policies in the days leading up to shareholder votes. Both General Electric and the Walt Disney Company made changes to their compensation structures in the face of dissent.
Moreover, the new regulation has defined clear processes for determining executive compensation to ensure that the country club back-slapping of earlier years is not followed. In Britain and Australia, where say on pay already exists, it has not stopped the upward spiral of compensation, but there are assertions that this has tightened the link between pay and performance.
There is certainly a movement in this direction by companies in the United States, and there is evidence that executive pay is more tightly aligned with performance than it was 20 years ago. Another good sign: almost 80 percent of shareholders who voted on executive pay at Russell 3000 companies endorsed an annual shareholder vote as opposed to one every three years, according to I.S.S.
Executive pay should reward good performance. A man like Steven P. Jobs, who helped create hundreds of billions of dollars in wealth at Apple, should be compensated commensurately. But Philippe P. Dauman at Viacom was awarded $84.5 million, including $31.65 million in restricted stock compensation, last year for grants over five years. Will Viacom really earn enough through “Jersey Shore” spinoffs to justify this number?
In some cases, high compensation is appropriate; other cases, not. It also may be that the current system forces companies to tie pay more tightly to performance (a good thing) while driving up the absolute numbers.
But if the goal of these collective efforts is a reduction in compensation, the results are quite disheartening.
Article source: http://feeds.nytimes.com/click.phdo?i=6a97ed6e06f4107cb7a095c1a77133ef