Commentary by Graef Crystal
June 29 (Bloomberg) -- The Obama
administration’s plans to regulate executive pay for companies
on the Federal dole is a decent idea.
Last week, the U.S. Treasury Department
went further, recommending in a
report that Congress intervene in the pay process for every
company in the land. “To facilitate greater communication
between shareholders and management over executive compensation,
public companies should include on their proxies a nonbinding
shareholder vote on executive compensation,” the report states.
Too bad the proposal won’t do a thing to
restrain unbridled corporate compensation gluttony.
The problematic word in that passage is
Lawyers call that a precatory
resolution, derived from the Latin
precatio, meaning begging, a request or prayer.
This so-called say-on-pay policy is
being pushed by the high priests and priestesses of the
corporate governance movement. Their desire to do good is
exceeded only by their naivete. If a board compensation
committee has a record of giving top executives the moon, what
makes you think they will be cowed by a group of unlettered
shareholders, who can only pray for relief?
The pay proposal isn’t worthless. But
it’s not going to fix a broken system that lavishes unjustified
rewards on top executives at hundred of major U.S. companies, no
matter how well they perform for their true owners, the
Ending the abuses will require adopting
measures that have real teeth, not merely gums. Here are my
favorites, based on 50 years of studying, and for half those
years, designing executive pay plans:
-- Keep excessively paid chief
executives off other companies’ compensation committees. Someone
Lloyd Blankfein, CEO of
Goldman Sachs Group Inc. who made about $80 million last
year, must consider a top executive earning $30 million annually
to be a hardship case in need of a little extra motivation to
keep plugging away.
My own research of CEOs who sit on
compensation committees shows that the most highly paid
executives award the fattest packages to the CEOs whose pay they
regulate. Here’s an even better idea: bar CEOs from serving on
-- Require true shareholder approval of
all pay plans. Don’t limit approval to stock option plans or
free share plans. Extend it to cover every plan, whether payable
in cash or stock, for the highest-ranking officers in the
company. This would be real, binding approval, not one of those
namby-pamby precatory ones.
-- Fund the CEO’s annual bonus through a
shareholder- approved formula. In other words, take away the
discretion of the comp committee to rationalize huge year-end
payouts, e.g., by pointing to adverse exogenous events over
which the executive has no control but failing to note those
same exogenous events when they prove helpful to the bottom
-- Cap any cash bonus beyond a certain
amount, say somewhere between three and five times base salary
and then drain the remainder into free shares that wouldn’t vest
for at least five years. If things go badly in the future, top
executives will suffer through a reduction in the value of their
-- Dump stock options as we now know
them. Instead, pay the appreciation in the stock price after a
fixed interval of at least five years. Stop permitting
executives with insider knowledge to time option exercises or to
begin exercising an option after only one year, thereby making a
mockery of long- term incentive plans.
-- Push the Internal Revenue Service to
deny corporate deductions of excessive executive pay. The IRS
has always had that ability with respect to compensation that
isn’t considered “ordinary, necessary and reasonable.’’ But it
has almost exclusively confined its denials to closely held
companies, that being the type where the chairman of the comp
committee is the CEO’s uncle. The agency needs a good shove to
get back into the public company arena and single out companies
-- even if it’s only a handful -- that overpay their CEOs.
-- Require that no board candidate may
be elected without receiving a majority of the votes. No more
electing every director, even if he gets just 10 votes
representing his own shareholdings.
-- Require fiduciaries such as the
California Public Employees’ Retirement System, or
CalPERS, to give significant weight to top executive pay in
its buy and sell decisions. This is perhaps the most important
recommendation of all. If the company is paying excessively, a
call from CalPERS to the board saying that it is selling the
company’s stock unless the board wises up ought to do wonders.
And last, let’s get this right and just
dump the stupid say-on-pay business.
Crystal is a columnist for Bloomberg News. The opinions
expressed are his own.
To contact the writer of this column:
Graef Crystal in Santa Rosa, California at at
Last Updated: June 29, 2009 00:01 EDT