SHAREHOLDER VOTE ON EXECUTIVE PAY

It is good to see that the House has passed some new, far reaching financial regulation legislation. The bill will move to the Senate now. One element of the pending legislation is providing shareholders with an advisory vote on executive compensation. While that provision recognizes shareholder concerns over runaway compensation packages, it should not be expected to work any miracles because the vote is absolutely not binding on the officers and directors. It is advisory only. The only real control that can be expected must come from the compensation committee of the Board made up of “independent directors”. There is the rub. Most often, under the present methods of selecting “independent” director candidates and electing them, achieving a Board with a majority of truly independent directors is more of a myth than a reality (see the Post on this subject on this site). Unfortunately, no one has ever satisfactorily defined what level of total compensation is reasonable and what level becomes excessive. But, logic should dictate that instances of total compensation reaching eight figures (as in $10,000,000). It is very hard to imagine that, on a relative worth scale, one, two or three top executives in a large corporation can individually contribute enough to the corporation to be worth that level of compensation.. Stated differently, with all of the brilliant people being graduated each year from prestigious business schools, it is hard to imagine that there would be a lack of qualified candidates if a top job only paid $3,000,000 in total compensation. It would be interesting to speculate about what might really happen to the business of a corporation if its CEO suddenly died. Would the business suffer or would the team in place be able to carry on as if nothing happened? Any company totally dependent on a small cadre of top executives for its success may not represent a very safe investment.

Shareholders, particularly those owning large blocks of stock like pension funds and mutual funds, should become very pro-active in riding herd on executive compensation and making sure that executive performance is demonstrably worth the level of compensation granted.

At least for the moment, it would seem that Goldman Sachs understands the sentiment of investors and the public by foregoing top executive bonuses for 2009. But, what is sad is that the Republicans in Congress appear to oppose this new financial legislation in the misguided belief (or, maybe just stubborn opposition to any Democratic sponsored bill) that the country doesn’t need financial regulation. It is difficult to understand how fiscal conservatism is somehow inconsistent with financial regulation designed to prevent any repeat of the financial collapse of 2008.

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