A chance to cap executive pay
MADELAINE DROHAN
GLOBE AND MAIL UPDATE
Jane and Joe Six-Pack may not understand the intricacies
of the deal, especially if their only source of information is President George
W. Bush, whose deer-inthe-headlights address to the
nation Wednesday night was neither terribly informative, nor reassuring.
But they do understand the inherent unfairness of giving
their hard-earned money to men with stratospheric pay packets, without
attaching any strings. It would have been hard for members of Congress to
ignore the entirely predictable public backlash, even if this were not an
election year.
Legislators now have an historic opportunity to use this
crisis to make some much-needed changes to the rules for executive pay. Will
they use it? Or, in their hurry to cobble together a bailout package with the
threat of financial Armageddon hanging over their heads, will they do a quick
fix limited only to the immediate bailout, thus ensuring there will be more, if
slightly different, corporate crises linked to compensation down the road?
The details trickling out of
That's fine as far as it goes. But
Ever since excessive pay first became an issue back in
the 1970s there has been talk of legislating the
relationship between the money received by an executive and that received by
the lowest paid employee. Back then the average for executive pay was something
like 25 times that of the humblest worker on staff. It has since soared to more
than 350 times.
Some companies tried it on their own. Ben and Jerry's,
the ice cream maker from
Perhaps a higher number would work, but then who would
decide what that number would be? Business would not want to leave this up to
politicians. They might set the bar too low. Yet in the absence of legislation,
companies refusing to cap their executives' compensation could raid firms who
had imposed some limits. The whole exercise is too complicated to contemplate.
Congress has made other attempts over the years to set
hard limits on things like golden parachutes or the tax deductibility of
executive salaries. A 1984 law stated that golden parachutes worth more than
three times the base salary of an executive would not be tax deductible. In
1993, a law was passed that said only the first million of salary could be deducted
from tax. Both measures led to companies gaming the
system to ensure that executive pay kept rising.
All of these attempts failed because they did not
recognize that excessive pay is a symptom of a much deeper problem –
shareholders no longer control the companies they own. This isn't true in all
cases. Majority shareholders do have a greater say. But in widely held
companies, management is running the show, held in check by a board of
directors, which may or may not have been hand-picked by management in the
first place.
The disconnect between the
ultimate owners and the company was glaringly obvious in the Enron, WorldCom
and other scandals, after which the Sarbanes-OxleyAct
was passed to improve corporate governance. While it may have led to
improvements in other areas, it has not had much impact on salaries.
Yet this is not an intractable problem. Members of
Congress could take advantage of the current crisis to do some good with two
simple steps that do not involve complicated ratios, amendments to already
Byzantine tax laws, or more onerous burdens for corporate directors.
Step one is to pass a law requiring absolute transparency
on what executives are paid. There were moves in this direction in 2006, but
the presentation of figures is still too complicated. Executives know to the
last penny how much money they are due to receive. Shareholders should have the
same, clear information.
Step two is to pass a law requiring every company to hold
a binding vote by shareholders every year on executive pay. Shareholders are,
after all, the owners of the company and should be the ones to decide what
their managers are worth.
If excessive pay awards continue, so be it. The owners
will have decided. Right now they don't have that right.