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 Salary Caps on Corporate Compensation
by Tom Campbell
March 19, 2009
Entitlement is a word with negative connotations. Usually we hear it applied to people on the government dole, but more and more it is being applied to corporate executives who think they are entitled to corporate jets, multimillion dollar salaries, stock options and extravagant bonuses.
The gap between compensation of corporate executives and average workers has escalated faster than a space shuttle launch. A 2001 Business Week article revealed that in 1980, Chief Executive Officers made 40 times as much as the amount the average worker earned. By 1994 that spread had increased to 84 times. By 2000 it was 475 times as much. Are Chief Executives 435 times smarter than in 1980? Are these companies so much better managed? Why this rapid acceleration in compensation?
Look to corporate boardrooms first. You might be naïve enough to believe corporate directors are selected by shareholders, and while it is true that shareholders vote on them, the selections are made by corporate executives and other board members. These recommendations are, with few exceptions, approved.
Serving on corporate boards has become lucrative. Handsome five-figure fees for attending board meetings, meetings held in resort locations, tickets to a myriad of events, and even use of the corporate jet for personal travel are the perks for serving. It is a nice gig if you can get it. Corporate executives go to great lengths to pamper their boards because the boards set executive salaries, bonuses and other compensation.
The execs have a large role in picking and pampering the board and the board picks and pays the execs and both look after the other in this good-ole-boy insider club. Board members and execs will tell you they are being compensated for results. While partially true, the yardstick is generally short-term profits, quarterly dividends, and stable to rising stock prices. Nobody asks many questions in good times.
But what happens when the executives and their boards make dumb decisions, like buying an out-of-control mortgage company all the way across the country or taking on a derivative-laden, sick-to-almost-dead brokerage house that insists on rewarding huge bonuses to those who almost killed it? When corporations get in trouble they typically fire large numbers of employees, cut the shareholder dividends, maybe even reduce benefits to retirees, but little happens to those responsible for those decisions. The execs are supposed to keep their salaries and expect to receive their bonuses, especially important since stock options are no longer attractive due to the tanking of stock prices.
Shakespeare never wrote a farce more ludicrous than what is going on in corporate America. It is time corporate boards start doing their fiduciary jobs of asking tough questions, performing due diligence, holding executives accountable, firing those who jeopardize the business and taking control of this out-of-control compensation of executives.
The argument that executive talent is scarce and we have to pay top salaries to keep top talent is equally flawed. Forgetting for a moment their recent performance, corporate America didn’t have a problem finding top executive talent in 1980 when the CEO was paid 40 times more than the average worker. Maybe we need to institute a salary cap like baseball and football have done. Executives need to be fairly compensated, as do boards of directors, but shouldn’t that be a two-way street? If corporations don’t get executive compensation under control we are betting consumers and shareholders are upset enough to do the job for them. |
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