A Say on Executive
Pay
EDITORIAL, NYTimes on
the Web, May 26, 2007
Executives have always been paid at
the top of the corporate scale, but as the gap between them and average workers
widens into a chasm, more people have begun to ask how much is too much.
Shareholders of Verizon Communications recently passed a measure that would give
them an advisory vote on compensation packages for top executives.
Shareholders at roughly 20 companies have pushed such say-on-pay proposals.
And Congress appears ready to act if companies don’t. The House of
Representatives has passed a bill that would give nonbinding votes on pay to all
shareholders, like those that Britain and Australia already have.
The board of directors at Verizon could ignore the vote if it chose to;
shareholders elect board members to make policy, after all. But they would
be wise to listen. Ignoring this message would likely give impetus to the
legislation in Congress, which is not the place to set corporate salaries, or
prompt shareholders to return with a binding proposal. And at a growing
number of companies where directors need a majority of votes to remain on the
board, there is always the risk of being shown the door.
Many factors are driving compensation upward, including the frantic hunt for
talent accelerated by increasingly rapid turnover of chief executives.
Most investors are less concerned with absolute pay levels than the sense that
raises, bonuses and stock grants arrive as a matter of course rather than as a
reward for success.
The real value of say-on-pay is not to slash executive salaries as a matter of
principle, but to force corporate boards and their compensation committees to
better explain their decisions. That explanation should include the extent
of financial relationships with the consultants making recommendations on
executive pay.
The post-Enron reforms forced boards to eliminate conflicts of interest among
auditors, investment bankers and others. But little was done to address
conflicts of interest among pay consultants who may have other lucrative
contracts with the same companies — and strong incentives to please the top
executives. Those conflicts of interest fuel the irrational rise in
compensation — and the growing discontent among investors.
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