Government Must Tackle Executive Pay

Obama Speaks Out on Executive Pay

Everybody Else Silently Goes With the Flow

I Like Feet

Countrywide, one of the Country’s prime mortgage lenders and a party responsible for much of the mortgage crisis, sold out to J.P. Morgan last month for $4 billion. The average stockholder lost approximately 90% of their investment. Thousands of employees lost their jobs. The SEC and FBI are investigating. Nevertheless, on March 29, Countrywide announced its intention to pay its former top-two executives over $19 million in “bonuses.” In the corporate world this is called an “executive parachute package.” In the real world this is called “unmitigated gall.” In both cases it’s the same: bullshit.

To date the only politician or businessperson willing to speak out on the issue has been Kid Fearless, Barack Obama. In a speech yesterday Obama said that the employee-executive salary disparity must be fixed immediately. That is is unconscionable that executives are getting exorbitant bonuses when employees are losing their jobs and foreclosures are at an all-time high:

What’s wrong with this picture? These are the folks who are responsible for infecting the economy and helping to create a home foreclosure crisis — 2 million people may end up losing their homes.

The news organizations and wires have been completely silent on this issue. Hillary is way too timid to take this one on. And, typically, this is one of those skeletons conservatives would rather keep buried. Which is a shame, because this is an outrage. Take this quote:

….Aggregate top-five compensation was equal to 10 percent of aggregate corporate earnings in 1998-2002, up from 6 percent of aggregate corporate earnings during 1993-1997.

Got that? A full ten percent of corporate earnings go to the top five people in the company. The. Top. Five.

For some reason Americans have bought the conservative corporate line on executive salaries. The average American buys that government should not be involved in regulating corporate compensation. They have bought the line that stockholders will punish the executives who overpay themselves, that the free market creates a negative incentive to overpay executives, that government shouldn’t intrude into privately negotiated agreements, etc. But there’s a problem with this…

It’s not true.

The long-standing canard that stockholders elect boards, boards elect executives, thus the stockholders will punish executives who overpay themselves is a lie. It does not happen. I have searched for an example of stockholders punishing executives who overpay themselves via some proxy vote or other action. Couldn’t find it. I challenge anyone to come forward with an example. If anything the Countrywide bonuses are an example of what really happens. Executives cut deals with Boards beholden to them and the stockholders get screwed.

Shareholder/board corporate structures are supposed to maximize shareholder investment. If that means paying an executive an exceptionally high salary so be it. But that is not happening. The executives are getting the salaries regardless of whether they deliver returns. Check it:

The only mechanism to force corporations to make executive pay reasonable is the class action shareholder lawsuit. Such suits are rightly unpopular. They are counter-productive (the executive is generally indemnified, forcing the company to pay twice), ineffective (they have not caused companies to lower such salaries), and inefficient (settlements rarely benefit anyone other than the attorneys).

Obama is right. The time has come for the government to step in and protect stockholders, investors, and employees. Executive salaries should be paid only in an amount that optimizes shareholder return; no more. Their compensation should be tied to long term growth and their should be “claw back” measures that remove previously granted bonuses where later failings lower the stock price. Business will be better served when executive salaries are more reasonable.

The government’s role is to get involved when there are no other options or solutions left. Corporate America has been aware of this issue for a long time now and done nothing. Stockholders have been aware of this issue for a long time now and have done nothing. The structure of passive investment is such that there is no real mechanism to effect change. Although conservatives and commentators say the problem will take care of itself, it hasn’t.

It’s Government’s time to act.