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Bloomberg, June 29, 2009 column


Executive Enrichment Rules Doomed by Naivete: Graef Crystal


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 “nonbinding.”

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 shareholders.

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 like 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 comp committees.

-- 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 line.

-- 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 shareholdings.

-- 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.

(Graef 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





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