January 17, 2006
New SEC Executive Pay Rules
The SEC meets today to vote on a new set of disclosure rules for executive pay packages. The WSJ broke the story last week but did not have the specific language of the new rules. Today we will have the language of the proposed rules. Executive pay has been a puzzle for government lawmakers.
Studies have shown that total senior executive pay has increased dramatically in relationship to any relevant, studied benchmark -- as compared with firm specific profits, average industry profits, blue collar workers salary, white collar workers' salary, inflation or interest rates, average country wide real wages -- you name the index and senior executive pay has increased in ways that are not explained by the numbers. Either executives were underpaid in the past or they are worth more now than in the past or they are overpaid now. Most believe that executives are overpaid now (there is a respective disssent to this view). So what can we do about it?
A cap on salaries? Too inflexible (even if a pre-set, fixed ratio to something else -- both worker and white collar salaries have been mentioned). A government official appointed to approve all salaries? Too French. A limit on deduction of salaries? Tried it in 1983 and it backfired. The limit ($1 million) became the floor and the loophole (for performance pay) became the norm creating the enormous and obscure options packages that we have today. More accurate disclosure? It is worth a try.
It is nothing short of amazing how the current rules allow corporations to fudge on the disclosure of executive salary. Corporations can use deferred compensation plans, retirement plans, options plans, dividend plans on restricted stock, and perquisites to hide payments of millions in compensation to executives. Indeed, the exploitation of the disclosure loopholes was an important factor in creating the compensation packages. Companies at present must disclose the existence of the plans but can hide the present value of the plans. The SEC aims to force disclosure an easy to understand, present value calculation of the total compensation package.
Increased, more accurate disclosure will go hand in hand with holding boards of directors accountable for granting executives such pay packages. Increased, more accurate disclosure may even add efforts to make shareholder voting for boards of directors more robust. Increased, more accurate disclosure may also enable hedge funds to act on studies that show outrageous pay packages are correlated with poor firm performance -- buy control, change managers (and pay), sell control at a higher price. Increased, more accurate disclosure may be the cornerstone of further, healthy governance changes.
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In a private market system, one would wonder why the government would be concerned with how much those in the private market are paid. Perhaps someone should do a study of how productive government employees are and see if there is a corrolation to their pay. But I agree that if a government rule - such as disclosure requirements - creates a problem, then it should be corrected. One has to wonder if the financial market has caught on to the fact that overpaid CEO's under perform and whether that is reflected in the stock price: Efficient Markets Theory says it probably is.
Posted by: Jerami J. Davidson | Jan 17, 2006 9:42:51 AM
We can do a great deal more about executive pay excess than forging better disclosure regs, as important as these regs would be.
For starters, how about giving a real hearing to the Income Equity Act introduced last summer by Rep. Martin Sabo (D-Minn.), legislation that would deny corporations tax deductions on any executive compensation that runs over 25 times the pay of a company's lowest-paid worker.
The great Peter Drucker, to place Sabo's proposal in perspective, believed that the most appropriate ratio between corporate top and bottom would be 20 to 1.
Posted by: Sam Pizzigati | Jan 18, 2006 5:27:19 PM