FT REPORT - CORPORATE FINANCE 2008 -
FRONT PAGE: Gentlemen, please empty your pockets
Francesco Guerrera in New York
Published: Mar 26, 2008
was not supposed to end like this: with three former Wall Street titans
sitting glumly in a Washington hearing room being accused by members of
Congress of having enjoyed fat pay packages while their shareholders were
Yet, as Chuck Prince, former chief executive of Citi, Stanley O'Neal, his
hitherto counterpart at Merrill Lynch, and Angelo Mozilo, who heads
Countrywide Financial, were castigated as the poster boys of excessive
executive compensation, corporate America was keeping a nervous watch.
When Henry Waxman, the feisty Democratic chairman of the Congressional
committee that convened the hearing earlier this month, fulminated: "It
seems like everybody is hurting, except for the CEOs who had the most
responsibility," he highlighted a fundamental shift in the US debate over
As years of solid economic growth and booming capital markets gave way to
credit woes and financial turmoil, the issue of executive pay moved from the
tight confines of boardrooms and shareholder meetings into a much broader
With the backlash against rising income inequalities gathering pace - and
the serious prospect of a Democrat in the White House next year - US
companies have been forced to justify the multi-million dollar rewards of
their leaders to an increasingly sceptical public.
"Executive compensation is the major topic on companies' and investors'
agendas at present," says Jim Melican, chairman of Proxy Governance, which
advises fund managers on how to vote in annual shareholder meetings.
The stakes are high. Unless US companies can convince investors and other
constituencies that their bosses' pay is fair and linked to performance,
there is a big chance that Congress and other regulatory authorities will
step in with radical measures of their own.
In many ways, the challenges faced by corporate America mirror those
undergone by their European counterparts in the past few years.
Ever since 1994, when Cedric, a 280lb pig, was produced at British Gas's
annual meeting by shareholders protesting at the pay of the then chief
executive Cedric Brown, UK corporate leaders have tried to avoid the label
of "fat cats".
In countries such as Germany, France and Italy, there have also been
grumblings of discontent about the transparency and size of corporate
But in America, the debate has assumed a wider resonance for three main
First, US corporate chieftains tend to be paid a lot more than their
European counterparts. On average, the chief executive of an S&P 500 company
received total compensation, including stock options and other benefits, of
$11.5m last year, according to Reuters Estimates.
That is more than the £4.6m ($9.1m) earned by Sir Terry Leahy, one of
Britain's most respected chief executives, whose company, the supermarket
chain Tesco, grew profits by more than 20 per cent in 2007.
Second, the link between US executives' pay and their companies' performance
has been weak. Last year, for example, the median income of an S&P 500 chief
executive nearly doubled while the average profit of their companies rose by
just 12 per cent.
In the words of the billionaire investor Warren Buffett, whose annual salary
is just $100,000: "Too often, executive compensation in the US is
ridiculously out of line with performance."
To make matters even trickier, over the past few decades US executives' pay
has been ballooning while workers' wages have stagnated.
Experts estimate that US executives make more than 400 times the average
wage for a production worker - a potentially explosive gap at a time when
many Americans are fearful of losing their jobs and struggling to pay their
These factors, coupled with US companies' recent troubles with the credit
squeeze, have emboldened activist investors to turn executive pay into a
Following the example of the UK, where shareholders have an annual
non-binding vote on executive compensation, a coalition of union-backed
pension funds, religious groups and other "socially-responsible" investors,
have launched a campaign for a "say on pay".
More than 100 companies, including blue-chips such as Citi, Morgan Stanley
and General Electric, are facing calls for "advisory votes" on pay in the
upcoming season of shareholder meetings.
And although investors' proposals to change corporate behaviour rarely
gather many votes, last year's "say on pay" requests won a majority of the
vote in eight of the 50 companies targeted by campaigners.
According to supporters of greater shareholder involvement in pay decisions,
those victories, which included high-profile names such as the
telecommunications groups Verizon and Motorola, underline investors' growing
interest in the issue.
"We expect that shareholders will be even more concerned this year," says
Richard Ferlauto, director of pension and benefit policy at the American
Federation of State, County and Municipal Employees - one of the masterminds
of the campaign. "When everybody is making money it is fine for the CEO to
make lots of money, but when things change, so does shareholder sentiment."
These feelings appear to be spreading to the boardroom. Eight out of 10
outside directors polled by the National Association of Corporate Directors
said chief executives were overpaid.
Opponents of such arguments maintain that forcing companies to submit to an
annual referendum on executive pay flies in the face of the principle that
it is the board's responsibility to decide how to remunerate the top
Some argue that the vibrancy of US capitalism has been underpinned by an
entrepreneurial spirit that can be nurtured only by promising large rewards
to the winners of the corporate race.
Proponents of this view argue the "say on pay" campaign is just an attempt
by left-wing investors to advance their causes at the expense of management
and other investors.
In a recent memo to clients, lawyers at Wachtell, Lipton, Rosen & Katz, a
firm famous for its prestigious roster of corporate clients, urged companies
to fight back against the rising tide of discontent against executive
"Compensation committees will need to weigh pay-for-performance principles
against the need to attract and retain employees," they wrote.
But the issue has caught the attention of influential politicians such as
Barney Frank, the Massachussets Democrat who chairs the House Financial
Services Committee. Last year, the US House of Representatives passed a bill
requiring companies to hold advisory votes on executive compensation.
The measure was never ratified by the Senate, but many in the corporate
world fear a Democratic landslide in the November elections could bring
executive pay back to on to the legislative agenda.
"The last thing we need is Sarbanes Oxley-style legislation on executive
compensation," says a senior executive at a large US company.
But even if Congress refrains from launching into diatribe on compensation,
America's bosses are unlikely to be able to enjoy their rewards in the same
way as in the past.
As their pay becomes a matter of public interest, executives will be
increasingly required to make a positive case for their salaries and
bonuses. Keeping quiet about executive pay is, as Mr Prince and Mr O'Neal
would testify, no longer an option.