Corinne Ramey

Say on Pay, or Why $83 Million a Year Might Be a Bit Too Much

John Thain was really raking in the dough last year. Thain, the CEO of Merrill Lynch, earned nearly $83.8 million dollars, despite the fact that his company's stocks fell 41%. So while Thain's fortune was growing exponentially, Merrill Lynch's shareholders were watching their stocks plummet.

And Merrill Lynch is not an isolated case. Average CEO pay was 179 times that of the average worker in 2005, according to the Congressional Budget Service. Although the pay of the average worker increased only 8 percent between 1995 and 2005 when adjusted for inflation, the median pay for CEOs rose 150 percent at the 350 largest companies. In an article in the Times, Paul Hodgson, a senior research associate at the Corporate Library, said that, as the economy enters a possible recession, shareholders were furious about the increasing gap between executive compensation and company performance. “They are furious about the dichotomy of experiences — their shares fall, yet C.E.O. pay still rises,” he said.

Is there something wrong with this picture? Ben Stein, in an essay on executive compensation, quotes his sister, Rachel Epstein. “Your basic human is not such a hot item,” she wrote. To put it in other words, he asks, are these "basic humans," -- or, uh, CEOs -- worth their million-dollar pay checks?

A series of articles in Sunday's Times focuses on rapidly escalating executive pay in America. The series centers around a recent study by a compensation firm named Equilar, which compiled data about executive pay at 200 companies. All the companies had revenues of at least $6.5 billion and filed proxies by March 28.

Although pay and shareholder value in some sectors of the economy was more disconnect than in others -- such as the real estate sector, which struggled with the subprime mortgage crisis -- the pay of CEOs across the board was divorced from the performance of their company. For example, says the Times, "The chiefs of the 10 largest financial services firms in the survey were awarded a combined total of $320 million last year, even though the firms reported mortgage-related losses that totaled $55 billion and that wiped out more than $200 billion in shareholder value."

After reading the articles in the Times I spent some time playing with this interactive tool, and -- as soon as my jaw stopped dropping after I looked at the exorbitant CEO compensation packages -- I eventually began to get frustrated with the total lack of correlation between the orange circles that represented change in pay and the orange circles for change in stock prices.

But, luckily, there is the possibility that those little orange circles might begin to move in the same direction someday. A new policy called "say on pay" has recently dominated discussions of CEO compensation. Say on pay is the policy of giving shareholders a non-binding, yes or no vote or executive compensation. Although fairly new to the U.S., say-on-pay policies have been used internationally with a fair amount of success. "Say-on-pay resolutions have been common in Britain and Australia for several years, and governance experts say they have most likely reined in compensation in those countries," writes the Times. In the UK, say on pay has curbed executive base pay and tied CEO pay more closely to company performance. Say on pay has also slowly made its way to this side of the Atlantic, with Aflac becoming the first American company to give shareholders a vote on executive compensation. Other companies -- including Verizon, Blockbuster, and Par Pharmaceutical -- have voted to introduce say-on-pay measures in coming years. Daniel Amos, the CEO of Aflac, said that he hoped that say-on-pay policies would enhance the reputation of his company. “We want people to look at us and say, ‘Here’s a company that will even let you vote!’ ” he said in the Times. “It’s symbolic, but it’s an important symbol.”

There is say-on-pay legislation, titled The Shareholder Act on Executive Compensation, that is slowly making its way through the process. The bill passed by a two-to-one margin in the House, and Barack Obama introduced a similar bill in the Senate. However, the Administration has opposed the legislation, saying that it "does not believe that Congress should mandate the process by which executive compensation is approved."

So will these "basic humans," as Rachel Epstein says, continue to earn these exorbitant salaries? Likely, although say-on-pay regulations do certainly have the ability to hold CEOs more accountable. But still, what about the rest of us "basic humans" out there, like, say, the workers? While shareholders matter, shareholder approval and stock performance don't always mirror other important aspects of a company -- like environmental record, treatment of workers, or general contribution to society. So while say on pay is certainly a step in the right direction towards corporate accountability, it's not the one-size-fits-all solution.

Corinne Ramey: Author Bio | Other Posts
Posted at 6:52 AM, Apr 08, 2008 in Economy
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