Putting Curbs On Executive Pay
A few years ago, Business Week reported that the executive pay packages of America’s public corporations equal roughly 500 times the salaries of their workers. Earlier, those packages were only 140 times larger. Most recently, the average corporate executive of a Standard & Poor’s 500 company made $14.78 million in annual compensation.
Appalled by these and other relevant data, the U.S. House of Representatives passed HR 1257 in 2007, the Shareholder Vote on Executive Compensation Act, by a vote of 269 to 134. The measure was to give shareholders of public companies a non-binding vote on executive pay. The bill did not set limits on compensation. It did, however, give shareholders a separate advisory vote if directors reward an executive with a “golden parachute” while they are negotiating to sell the company. Advisory votes on compensation have been effectively used in Sweden, Britain and Australia.
HR 1257 was initiated by Barney Frank, D-Mass., the chairman of the House Financial Services Committee. Shareholder advocates and pension funds were supporting the measure. They feel cheated out of their fair share of company gains when the aggregate compensation of the top five executives exceeded 10 percent of the total.
Earlier in the year, President Bush had questioned extravagant executive remuneration, but as the bill went to the Senate, he opposed it with the argument that government should not regulate the internal decisions of private corporations. The bill’s opponents argued that the Securities and Exchange Commission was already requiring that the boards of corporations inform shareholders of the total amount of each executive’s pay package and of the reasons for its size.
Barack Obama, who was then a Democrat from Illinois, promised to produce an “identical” bill in the Senate. An Obama aide explained that the senator’s bill “would allow shareholders to hold executives to similar performance standards that workers are held to.”
While corporate bosses routinely made tens of millions of dollars in annual compensation, the president of the United States got $400,000 a year, the chief justice of the Supreme Court $212,000 and cabinet secretaries — who administer hundreds of billions of dollars — $183,500. No wonder that the public was outraged when, for example, Robert Nardelli, the CEO of Home Depot, received $210 million for his services, after the board dumped him for failing to reverse the company’s unsatisfactory performance.
Compensation for public officials from the president on down has to be approved by publicly elected lawmakers. Yet, even in the public sphere, the exorbitant and escalating pay differentials between bosses and the rank and file have become difficult to justify. Anybody who knows the stressful demands made on public schoolteachers cannot understand why in some districts school superintendents are awarded $250,000 annually while the value of teachers is assessed at $40,000.
In the corporate world, the usually wealthy members of the boards are so accustomed to extraordinary income levels that they fail to see the unfairness of the reward differentials between executives, employees, and shareholders. It is still rare in the United States that employees or shareholders resist the gross misappropriation of corporate funds by executives and directors.
When now Congress at long last is acting to protect shareholders from the theft of their fair share of corporate profits, the directors and executives have only themselves to blame for the increase in government regulations. This was not the first time Congress moved to prevent abusive corporate conduct. Already in 1890 Congress passed the Sherman Anti-Trust Act when it became obvious that some of the “robber barons” at that time were bent on destroying free enterprise by destroying competition.
Like the anti-trust laws, the Shareholder Vote on Executive Compensation Act was an attempt to assure fairness for all players in the market.