Amy Traub
Lousy Performance, Lavish Pay? Ending the CEO’s Free Ride
We’ve seen this scenario before: the company was mismanaged. Perhaps it took foolish risks or made reckless acquisitions. In the short term, stock prices soared, but then they plummeted. Ordinary investors saw their retirement savings decimated and their kids’ college fund go bust. But the CEO and other top managers who drove the company into the ground are still exorbitantly compensated, with sumptuous salaries, outrageous perks, back-dated stock options, bountiful bonus pay, and golden parachutes all around.
We’re rightly outraged when it happens at banks with taxpayers on the line. But the phenomenon of lavish pay for lousy performance is even more widespread.
What are investors – the folks who own the company, after all – to do? And how can they prevent this scenario in the first place? Senator Charles Schumer thinks improved corporate governance – including giving shareholders a chance to weigh in directly on executive compensation – is one answer. According to the Wall Street Journal, Schumer is set to introduce legislation this week giving shareholders at all public companies a non-binding vote on the top execs’ pay. It’s an excellent idea.
The Drum Major Institute highlighted “Say on Pay” policy at our Marketplace of Ideas series last fall, listening to some of the nation’s foremost investor advocates as well as the CEO of Blockbuster Inc., one of the first American companies to voluntarily adopt the policy. While far from a panacea, studies suggest that non-binding Say on Pay votes can be effective at giving shareholders a stronger voice and ultimately have the potential to rein in out-of-control executive compensation. Blockbuster CEO Jim Keyes describes another benefit of the reform. “Opportunities like "Say on Pay" are yet another step in building credibility and trust in the investment community,” Keyes insists. “Some would say there aren't enough teeth in the "Say on Pay" provisions, I would suggest that there are teeth in the fact that shareholders' voices must be heard. If we continue to ignore it, we're going to lose shares, we're going to lose shareholders' confidence and lose value over time.”
But there are limits to what Say on Pay can accomplish. Corporate governance reforms – no matter how effective – are designed to protect the interests of shareholders, not consumers, employees, or the public at large. Say on Pay is no substitute for much-needed financial regulation, as Senator Schumer and others have recognized. Research suggests it’s also likely to be ineffective at closing the cavernous gap between executive compensation and the skinny paychecks most of the rest of us bring home. To do that, we might more productively focus on policies that boost pay for those in the middle and at the bottom. But with a broad swathe of the American middle class relying on the stock market for retirement security, policies that give shareholders a greater voice in corporate decision-making are worthwhile in their own right.
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Posted at 8:38 AM, Apr 28, 2009 in
Corporate Accountability
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