Power Struggles Over Pay

Gary Larkin’s recent post, 2011 CEO Succession Report: Dismissals Up, Outside Hires on the Rise, informs Conference Board readers that Institutional Shareholder Services has launched an executive compensation database service for its client subscribers. Say on Pay rules were the driving force behind the new service.

The database includes historical CEO and NEO (named executive officer) compensation data for more than 4,000 U.S. companies, together with Say on Pay data for the most recent reported period. Salary, bonus, stock-based incentive awards, option grants, non-equity incentive plan payouts, deferred compensation payouts and other components of total compensation are also included.

Meanwhile, Ronald D. Orol at MarketWatch warns Beware of Institutional Shareholder Services. “ISS has flexed its muscle in skirmishes over executives who are paid from company coffers to cover millions of dollars of their golden-parachute tax liability” using tax gross-ups.

Yes, ISS is influential but they recommended against, as I recall, 12% of pay packages; shareowners only voted down 2%. That’s not a very high success rate on that front. With all the public outrage against high CEO pay, you would think that shareowners would not only vote with ISS on “say on pay” but would go well beyond ISS recommendations, voting against the majority of packages. Can we hire excellent CEOs for less than the $9.3 million median for large companies? Yes, I think we can.

A huge chunk of stock is owned by mutual funds who don’t want to alienate potential clients for running 401(k) plans. However, another large chunk is owned by retail owners who don’t subscribe to ISS services.

The U.S. Proxy Exchange is trying to make it easy to decide which pay packages to vote against packages through guidance that takes 10 minutes. Top experts have weighed in on draft guidelines. How about you? Read comments and draft guidelines; add to the dialogue.

Back to Larkin’s post. It seems a bit out of context in the post, but Larkin also notes that Bob Monks, co-founder of The Corporate Library, has observed that the traditional pension is now only retained by CEOs while employees are left to fend for themselves when it comes to saving for retirement.

This has long been an important issue for me. The US Chamber of Commerce and the Business Roundtable have been leading the charge against public pension funds, yet their CEO members retain defined benefit plans for themselves.

In 2005 I presented a paper at a London conference explaining the attacks on defined benefit plans. Near the end I pointed out:

All of the CEOs in the S&P ExecuComp database have defined benefit plans. Of course, qualified pension plans (exempt from taxation) are limited to about $200,000 a year and the average S&P 500 CEO earns much more. Supplemental executive retirement plans, known as SERPs, are an inefficient way to compensate CEOs but they come with one great benefit – camouflage. “Neither the increase in value of the SERP plan before retirement nor the amount of payments after retirement appears in the compensation tables, the existence of SERPs, and the formulas under which payouts are made must be disclosed in the firm’s SEC filings.” While CEOs want to keep their own defined benefit plans, they want to outlaw them for public employees.

Isn’t it time regular people fought back against CEOs who seem to want a larger and larger share of the wealth corporations generate for themselves? Isn’t avarice still a vice?

Economist Frank Knight once noted, “it is human nature to be more dissatisfied the better off one is.” With average pay of $9.3 million, it is still not enough. As Thomas Sedlacek writes in a forthcoming book, our society has become monetized; our desire for increased wealth is never ending. In fact, the more we make, the more we want. “The further you walk toward the rainbow, the further the rainbow, and the treasure, advance.” Or is Paul Simon sings, “The nearer your destination, the more you’re slop slidin’ away.” (Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street)

CEOs will ask for and will get more pay until shareowners rebel. If we are ever to tackle large problems like global climate change, we will need to adopt Aristotle’s advice that the only characteristic that cannot be taken to extremes is moderation. Let’s start at the top; CEOs could use a healthy dose. Wouldn’t that be a nice sentiment to trickle down?

See also, Income inequality grows as CEO pay climbs above historic levels, Seattle Times, 6/25/2011.

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