October 12, 2006
Executive Compensation and Government Regulation
The article by Joann S. Lublin and Scott Thurm in todays Wall Street Journal ("Behind Soaring Executive Pay, Decades of Failed Restraints") should be required reading in all American business schools and in all American law school courses on corporate law. It makes the point that with each new law attempting to control executive pay came "unexpected consequences," executive pay increased. Each law had exceptions for pay that the law makers felt was justified, and companies turned the exceptions into uniform practice, increasing pay.
IN 1984, Congress taxed golden parachutes if over three times salary. Parachutes, rare before 1984, became the norm after 1984 for all companies at -- you guessed it -- three times salary. Now they are over three times salary and the companies pay the tax (gross up provisions). In 1992, the SEC forces companies to disclose more on pay packages; after 1992 salaries skyrocket as CEOs now know what each other make and all demand to be in the "top half", ratcheting up the pay scale. In 1993 Congress caps the deduction for cash salary at $1 million and exempts some kinds of "performance based" compensatory stock options. Before 1993 most executives did not get $1 million in cash, after 1994, all CEO salaries were at $1 million in cash. Now cash salaries over $1 million are common; companies do not worry about the deduction. Compensatory stock option grants soared. By 2001 Larry Ellison took home $706 million in a single year. When FASB finally required the expensing of stock options in 2003, companies began to distribute "restricted stock." Severance payments have soared and golden parachutes, a version of severance payments, are up. Kilts, from Gillette, took home $185 million when he sold Gillette to Proctor & Gamble (and was indignant when anyone suggested that it was too much). Indignant. There is the guts of the problem. The man should be ashamed, or at the very least a wee bit guilty (and thankful for his undeserved good fortune).
TrackBack URL for this entry:
Listed below are links to weblogs that reference Executive Compensation and Government Regulation: