New rules would stop short of
CEO pay caps
White House pressing for
more transparency, shareholder 'say on pay'
8:24 p.m. ET,
Mon., June 29, 2009
the financial crisis that felled some of Wall Street’s biggest players,
politicians vowed to take a hard line against one of the most prominent
symbols of excess: lavish executive pay.
But don’t expect them to do that by actually putting a cap on how much
executives take home.
The Obama administration’s proposals for regulating executive pay are
focusing instead on making the process of determining compensation more
public, including giving shareholders a nonbinding say in pay packages.
The hope is that such measures act as a kind of peer pressure, forcing
executives and their boards of directors to be more fiscally responsible and
less focused on risky bets, but stopping short of making government
officials into pay police.
Members of Congress, who held a hearing on the matter in mid-June, appear
eager to push for legislation to regulate executive compensation more
tightly, perhaps even before their late summer break.
The attention to executive pay comes after years of watching salaries among
top brass swell substantially, although that has ebbed amid the financial
crisis and recession. An Associated Press analysis of pay packages for chief
executives of companies in the Standard & Poor's 500 index found that the
median pay package fell 7 percent, to $7.6 million, in 2008.
According to the AP analysis, the median cash payout of salaries and bonuses
alone for CEOs was $2.4 million, a 20 percent drop from a year earlier.
Still, that’s 48 times what the average worker makes, according to the AP.
While there has been an outcry over such disparity, Americans also may balk
at the idea of the government setting salaries, especially if such pay caps
trickled down below the executive suite.
“The idea of having a free labor market where your compensation isn’t
controlled by a government authority is very much in keeping with the sort
of liberal tradition in the United States,” said David Lewin, a professor at
UCLA’s Anderson School of Management.
Administration officials also may be pushing for transparency instead of pay
limits at least in part because it can be very difficult to design a law
that puts a real cap on executive pay packages, without any loopholes.
Politicians have learned that the hard way.
“The government’s previous attempts to kind of regulate executive pay have
been colossal failures,” said Carol Bowie, head of the Governance Institute
at RiskMetrics Group.
Perhaps the best-known example, an attempt at using tax laws to effectively
limit executive salaries to $1 million, simply led to an increase in other
forms of compensation, such as bonuses.
Also, any attempt to put a strict cap on executive pay would be difficult
and costly to enforce, given the hundreds of high-ranking executives who are
receiving a broad array of compensation, ranging from stock options to use
of the company jet.
“It’s one thing to pass a law. It’s another one to enforce (it),” Lewin
Instead, administration officials are hoping that a combination of tougher
market regulation and more avenues for shareholders to express their
displeasure will force pay closer in line with long-term corporate
One key aspect of the regulations laid out by Treasury Secretary Timothy
Geithner calls for shareholders to cast a nonbinding vote on whether they
approve or disapprove of how much the top brass were paid. The so-called
“say on pay” proposal does not give shareholders any material say over what
an executive gets paid, but many believe it would pressure board members to
offer better disclosures about how pay is calculated, and perhaps even limit
Ralph Walkling, executive director of Drexel University’s Center for
Corporate Governance and a professor of finance, said his research has shown
that executive compensation does tend to drop when shareholders give a lower
percentage of votes to compensation committee board members. Besides simply
selling their shares, that is the most overt way shareholders can show now
that they are dissatisfied with how pay is being doled out.
Lewin said those companies that have voluntarily asked shareholders to vote
on pay packages also, by and large, offered a more comprehensive discussion
of how they calculated the packages. Still, she thinks it’s too early to
say whether the “say on pay” proposal would be effective, if it became law.
addition to the “say on pay” plan, the Treasury also is proposing tougher
standards for ensuring the board committee that determines executive pay is
made up of independent directors, who have their own budget and authority to
hire consultants and lawyers.
The Securities and Exchange Commission also is proposing changes that would
require companies to tell shareholders more about how the company manages
risk, chooses board members and determines executive pay. But in a
statement, SEC Chair Mary Schapiro took pains to say that the regulators had
no intention of limiting what an executive can make.
“At the SEC, our role has not been to set pay scales or cap compensation.
Our role is to protect investors by ensuring that they have the information
needed to make sound investment decisions, whether those decisions impact
proxy voting or a decision to buy or sell a stock,” Schapiro said in the
Still, even the Obama administration’s more self-directed approach could
have unintended consequences. Some compensation experts believe government
regulations requiring executives to more clearly disclose their salaries and
other forms of pay had the side effect of actually raising executive pay,
since competing executives were more easily able to compare themselves to
other CEOs and demand a commensurate salary.
think many times when the government tries to legislate economics (it)
fails, just in the same way that often you can’t legislate forces of
nature,” said Walkling said.
© 2009 msnbc.com