THURSDAY, FEBRUARY 4, 2009
Curtailing executives' pay? Good luck with
February 5, 2009
Will President Obama's new plan to rein in executive
compensation at companies receiving taxpayer money be more successful than
Not if history is any guide.
Since at least 1984, Congress and accounting
authorities have enacted measures designed in whole or part to stem runaway
pay. Yet compensation for top executives has continued to climb in both
dollar terms and as a multiple of average worker pay.
No matter what Congress cooks up, it seems like
executives, companies and their consultants find a way over, under or
through the rules.
"It's like putting up a dam for a river. The water
tries very hard to find a way around it," says John Olson, a partner with
Gibson Dunn & Crutcher who advises corporate boards on compensation and
-- In 1984, Congress imposed tax penalties on
excessive payments, called golden parachutes, given to executives who lose
their job following a change in control of the company. Under the law, if a
parachute exceeds 2.99 times the executive's annual pay, the company cannot
deduct the excess amount and the executive could owe a 20 percent excise tax
But instead of shrinking, the average golden
parachute swelled as companies that had been making more modest payments
came to see 2.99 times pay as a standard. Olson says the average parachute
grew from less than 2 times pay before the law took effect to 2.75 times
What's more, some companies continued paying
parachutes bigger than 2.99 times pay. In addition to giving up their own
tax deduction, some even agreed to pay the executive's excise taxes. They
also paid the income tax the executive owed on the excise tax payment, as
well as the tax on the tax and so on.
These payments, known as a tax gross-up, grossly
inflate the cost of the excise tax to the company, says Alexander
Cwirko-Godycki, research manager with Equilar, a compensation-data company.
Many executives also receive tax gross-up payments
on taxable perks such as personal use of the corporate jet, although public
scrutiny is making this less common.
-- In 1993, then-President Bill Clinton, who had
promised during his campaign to rein in executive pay, signed a law that
prohibited companies from taking a tax deduction for top-executive
compensation that exceeded $1 million per year. But there was a loophole:
Any pay over $1 million could still be deducted if it was somehow
"That's what led to the huge growth of incentive
plans, including stock options," Olson says.
The result: In 1992, the average chief executive
earned $5 million, or 126 times the average hourly worker. By 2007, the
average CEO was earning $12.3 million, or 275 times the average worker,
according to Lawrence Mishel, president of the Economic Policy Institute.
-- In 2006, after a 10-year battle, the Financial
Accounting Standards Board required companies to start deducting an expense
for stock option grants on their income statements. "It was thought this
would rein in the excessive use of options," says Corey Rosen, executive
director of the National Center for Employee Ownership.
Instead, it merely shifted some compensation from
stock options to other forms of equity that companies had long had to
expense, such as restricted stock. It did nothing to tame the growth of
executive compensation. "If anything, it ratcheted it up even further,"
Why can't our legislators seem to pass a measure
that has teeth?
"Because Congress is not as smart as the people who
are immersed in this," says Jesse Brill, chair of CompensationStandards.com.
"People will always be able to find a loophole."
Although Obama's plan will apply only to companies
taking bailout money in the future and has escape hatches of its own, he has
promised that more sweeping reforms will be coming.
In the Senate, Obama was a champion of Say on Pay,
which would require public companies to give shareholders a nonbinding vote
on executive compensation. The company could ignore the vote, although doing
so would stir controversy.
"You can try all these different reforms," Rosen
says, but none will be truly effective "unless the board of directors, the
media and public stop thinking of executives as superstars and that if we
just get the right CEO, everything will be OK. If anything, the events of
the last year have shown that a company's success is a lot more complicated.
And a lot of it is nearly random."
appeared on page C - 1 of the San Francisco Chronicle
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