There has been continuing talk about limiting executive compensation including the possibility of appointing a “pay czar”. In response the pundits are crying “chicken little, the sky is falling”. All kinds of warnings have been issued as to why the government should not be involved in legislating or limiting executive compensation. But, the bottom line is that these warnings seem to come from the people who would be most effected – the bankers and executives. The warnings are not coming from the shareholders who are the real stakeholders. The warnings are, for the most part self serving.
If the bankers, boards of directors and corporate executives had taken to heart the frustration of shareholders over overly generous executive compensation they would have taken their own action to correct the situation. But, for most of them it is still business as usual and it is this lack of action that forces the government to try to protect the shareholders against the abuses of management.
Once corporate management gets into the program and takes thair own actions, governmental action will not be needed. But, as of now, the executives are still robbing the shareholders blind with their self rewards ratified by boards who like the perks of being directors.
How much compensation is enough? Can any executive make an objective case as to why he or she is worth $20 to over $100 million in total annual compensation? Has anyone made any definitive study of what an executive does to justify that level of pay? If an executive possesed some absolutely unique skill, perhaps arguments could be made to justify pay levels. But, management skills are not unique. Graduate schools of Business turn out new, bright managers every year. Managers are not like basketball players scoring 30 points a game or golfers consistently shooting 66 in tournaments.
The notion that high pay packages are necessary to attract talent seem questionable. If someone is a commission salesperson and is a super salesman, then obviously, their pay will exceed that of other salesmen. But, corporate managers are not commissioned salespersons.
We can only hope that the Boards of Directors across America get the message that the dhareholders are angry and frustrated with high compensation levels particularly when performance has been mediocre to abysmal at best.
The Wall Street Journal of December 15, 2009 contained an artcle reporting that executives at many companies experienced increases in the value of their retirement savings plans while employees lost between 18% and 31% of the value in their 401 K plans in the recent market downturn. Further, in many companies, the value of the stock had also declined. The fact that the employees lose and the shareholders lose while the executives win is just another example of how far out of whack executive compensation plans have become. This discrepancy arises out of the availability to executives of guaranteed returns on their savings plans (in some cases 6.6% or better). The companies maintain that these guaranteed returns are necessary to attract top quality executives. But, the bottom line appears to be that these executives want the shareholders and employees to be at risk while they have no risk. Their interests are certainly not aligned with those of the shareholders or employees. In this day and age when most people eran less than 3% on their savings or T Bills how is it that executives can be guaranteed over 6% returns?
All of this suggests the need for some form of regulation to protect shareholders and company employees from the executives lining their own pockets while everyone else is facing a struggle. Perhaps the only way to curb the abuses would be to impose an income tax of 55% on all executive compensation (salary, bonus, all perks, unrestricted stock options) above $3,000,000 per year with the sole execption of restricted stock options that can not be exercised or sold for 7 years from issue or 2 years after full retirement, whichever comes sooner. In this way, the interests of the executives and shareholders might be more aligned.