Have a Say on Say on Pay

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?

For some background, a wikipedia article overview on Say on Pay and executive compensation.

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:

  1. 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—
    1. the likely consequences of any decision in the long term,
    2. the interests of the company’s employees,
    3. the need to foster the company’s business relationships with suppliers, customers and others,
    4. the impact of the company’s operations on the community and the environment,
    5. the desirability of the company maintaining a reputation for high standards of business conduct, and
    6. 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.

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Comments

executive compensation

There are at least three companies I've dealt with as an IT/Network professional, who's CEOs were making buku dollars while my contract was cut short, or h-1b/L-1/L-2 visas were hired:

Com Ed/Excelon: John Rowe, CEO

JP Chase: Jaimie Dimon

Corliant: Indian management, sold Corliant to Accenture

United Health Care: Outgoing CEO was negotiating over $ 1 Billion retirement package while I couldn't afford my United Healthcare cobra payments

Cisco Systems: Running phony PERM/H-1B job ads, bypassing American citizens, while CEO and former CEO are worth over combined $3 - 4 Billion

OTHER DISHONORABLE MENTION:

Sen. Frank Lautenberg's company, ADP (Wilco) pimping in cheap visa labor (EVEN ON VISITOR's VISAS) while laying off American citizens I knew (congressional testimony on this in Feb. 2004)

Best Buy: American citizens laid off, and replaced by TATA visa workers while Richard Schultze, CEO Best Buy, worth over $3 Billion.

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It is a matter of accountability

A non-binding referendum will do nothing to solve the problem. How about requiring compensation committees to develop three options for executive compensation and submit it to a shareholder binding vote?

I am not comfortable having government dictate compensation levels for executives (sounds strange coming from a progressive). This is clearly the responsibility of the shareholder who is the owner of the company. However, there are things that the government can do to encourage or discourage certain behavior.

There are several challenges, big challenges, for corporate governance reform:

1) Independent directors. Right now, the chairman and CEO control who gets nominated to board of directors. So shareholders who do care about accountability don't really have a choice. Open up the nomination process either through shareholder proposal (SEC or congress can make these changes) or some other means. The other means is constitutionally challenging because state law determines how directors are elected. States will not make these changes particularly Delaware because corporations will just "forum" shop for another state with very lenient, management-friendly laws.

2) Taxation. Right now, if you look at the holding periods of shareholders, particularly institutional shareholders, it is very short. It is less than a year not enough to even vote in the next annual meeting. Entrenched management truly understands this. So, if there is huge turnover of shareholders there is very little interest in holding entrenched management accountable. Entrenched management run the companies as they see fit all too often focusing on short-term profits.
Suggestion: jack up the rate on short-term capital gains. Say 40% (John Bogle, founder of Vanguard Funds, suggest 50%).

Examine how executive compensation is taxed. If most of the compensation is in the form of stock options and stock then look at closing those loopholes by possible changing capital gains rules for compensation.

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Say on Pay Passes without much of a say

Say on Pay voted by House Financial Services Committee.

The measure gives shareholders an annual vote on salary and bonuses for top executives at all public U.S. companies. The votes are non-binding, meaning companies can ignore them.

Anyone want to tell me how this could possibly be effective if companies can just ignore shareholders?

I guess there is a cloud of good news in that the SEC can ban "incentives" which encourage "inordinate risks" but it appears to be just at banks.

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Executive Pay

Any company should continue to pay its employees any amount it deems it should. What went wrong with recent executive pay is that the government bailed out the companies - banks & automobile manufacturers.

People can express their disapproval with executive pay at shareholders meetings by voting out the executives. That's how that should be handled, not with more government regulation telling companies how to operate.

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In that case

Then I can't name a single company where the executives shouldn't be voted out. But it won't happen- because in many cases, the executives ARE the majority shareholders, voting themselves largess from the corporate treasury.

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Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.