CEO Compensation: Plus Ca Change, Plus C'est La Meme Chose

Executive Compensation has been a growing source of public concern.  Limits were included in TARP.  The bailout of the auto makers proposed by the White House contained restrictions, including the obligation to sell corporate aircraft.  But are these changes superficial?  As the Washington Post noted:

• If you're angry that so many executives got paid so much for screwing up so spectacularly, you might take solace in the fact that shares they still hold have lost value, too. But if you think executive pay is finally succumbing to the force of gravity -- if you'd like to believe that an epic destruction of investor wealth will fundamentally and permanently change the way chief executives are paid, or that you, dear shareholder, have the power to join forces with others just like you and create a more rational order -- don't bet on it. The nation's financial crisis could change the rules of executive pay, but if history is any guide, you'll have a lot more to complain about in the years ahead.

The explanation is the one that we have repeated over and over on this Blog.  The dynamics of determining executive compensation, those largely set by the Delaware courts, ensure that the amounts favor management.   As the article noted:  "For the most part, executive pay is set by executives. Executives dominate corporate boards, and corporate boards are self-perpetuating. As a practical matter, shareholders have little say in the selection of directors, and once directors are in the compensation boat, they have little incentive to rock it."

Nothing in the current spate of reforms and requirements change these fundamental dynamics.  One possibility would be for the Delaware courts to impose more meaningful standards on the board in determining executive compensation.  A road map for this type of reform can be found in Returning Fairness to Executive Compensation.  That would require a philosophical shift in the attitude of the Delaware courts, something unlikely to happen. 

The alternative is some type of permanent federal intervention.  The bailout term sheet for the auto makers contained one interesting possibility.  It required the CEO to certify under penalties of perjury that the board had considered certain aspects of the executive compensation equation.  In effect, the term sheet shifted to the CEO the obligation to ensure proper decisions. 

The most appropriate solution, however, is to facilitate the ability of shareholders to elect their own nominees to the board.  This will both provide some possibility of true shareholder representation on the board and focus the attention of management nominated directors on the interests of shareholders.  It will, in turn, cause directors to be more careful with respect to executive compensation.  Access to the company's proxy statement for shareholder nominees will facilitate this process.  It should be at the top of the agenda of the Commission once regime change occurs.

Comments

[Mr. Blair M. Phillips]

The business of business is business. Profits is the ethics and morality of Capitalism. Thats why it is doomed to fail.