Have your say on Say on Pay. Executives now get over a third of all income in the United States. We saw outrageous bonuses to the very people who put the entire globe on the brink of financial Armageddon with us footing the bill for their folly.
The debate is over on the need of corporate executive compensation reform. We must have reforms on how the top brass are paid in this country. Else we risk commissioning the very same captains for yet another economic ship of fools joy ride similar to the one which just brought this nation to the brink of doom.
Now the question is which reforms? Will they actually work as intended?
What would you like to see legislatively to align executive compensation with the national interest, the actual long term as well as short term success of the corporation, the shareholders, the workers, yes the executives and board and society at large?
The Hill is reporting markup of the Say on Pay bill is on Tuesday with a vote by Friday.
The bill in question is H.R. 3269: Corporate and Financial Institution Compensation Fairness Act of 2009.
From Representative Alan Grayson's office:
Next week, the Financial Services Committee is going to be marking up a bill on executive compensation, the so-called Say on Pay bill. Among other things, this bill mandates a nonbinding shareholder vote on executive compensation. Now, the vote is nonbinding, so the board could theoretically just ignore a shareholder no vote.
Let’s say that the legislation were changed so that the shareholder vote were binding. What would happen if shareholders vote no ? Would the executives then be paid nothing? That seems unreasonable and unworkable. How could this be structured so that the shareholder vote is binding, but there is some process to determine executive pay if management is voted down?
One book, Pay without Performance: The Unfulfilled Promise of Executive Compensation by Lucian Bebchuk and Jesse Fried exposes how executives are now compensated regardless of performance. In addition, an increasingly percentage of corporate profits are now going to fill the coffers of executives.
In 2004, Aggregate top-5 pay during 1993-2002 about $250 billion and executive pay was 7.5% of aggregate corporate earnings (10% during 1998-2002). Bebchuk & Fried also describe how managerial power over compensation packages has hurt long term corporate strategy, earnings potential and decoupled executives from even serving shareholders (never mind the thousands of employees and assuredly the national interest).
In the power point slides on the website Bebchuk & Fried recommend not only making executives and managers independent from the corporate board of directors but also in turn make the board of directors dependent upon shareholders.
I also want to point to Corporate Law Professor Margaret Blair and her testimony before the House Science Committee in 2008. She points to the British Companies Act 2006 to improve director accountability and responsibility, which I reprint here:
- A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
- the likely consequences of any decision in the long term,
- the interests of the company’s employees,
- the need to foster the company’s business relationships with suppliers, customers and others,
- the impact of the company’s operations on the community and the environment,
- the desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between members of the company.
Blair has papers, books available and is clearly an expert on corporate governance as well as executive incentive pay structures. Bear in mind this hearing was held before the financial meltdown, so now I quote a piece of Blair's testimony most prophetic:
In sum, decisions by managers and directors of U.S. corporations to choose investment strategies that may be profitable in the short-run, but that sell our country short by moving value-creating activities offshore, are decisions that those managers and directors must take personal responsibility for.
Yeah, think we don't need major reforms around corporate governance and executive compensation?
The point of this blog post is for you, the lurker, the reader to either point to a well crafted set of executive compensation policy recommendations you have studied and know will create the right incentives and/or to look over the bill before the House Financial Services committee and critique.
Here is a link to the bill text again. For example, on the question from Rep.'s Grayson's office to me it's clear the vote from shareholders must be binding, one must make the directors separated from management and responsible to the shareholders.
As a solution on binding votes by shareholders, a default pay mode on a no vote could be the previous negotiated total compensation package or even a reversion to a base scale. Take as an example, Public Citizen's cap the pay (they want this across the board) to some ratio of the lowest paid employee, say 30:1. I personally prefer a no vote be binding and one simply leaves the existing approved compensation package, as is.
Come on folks, pipe up, it's our wallet man.