I often hear about how CEO
salaries are decided by the investors/stock holders and thought it was time
to set the record straight.
Take note how over the past decade CEO salaries have risen in comparison to workers. Executive pay between 1980 and 2000 climbed an astounding 342 percent, outpacing the rate of inflation over the period by at least 4 to 1. In contrast, the average hourly wage for more than 100 million workers, when measured in 2003 dollars, rose from $14.86 at the start of 1980 to only $14.95 at the end of 2000. That’s a 9 cents an hour gain after 20 years.
The problem is that many corporate directors (so-called “inside” directors) report to the CEO. So their judgment is not exactly impartial. (“Hey, boss: remember that raise I asked you for? One reason I need it is because I’m staying late working on your generous pay package for next year.”) When it comes to “outside” directors (people who work for other companies), some CEO pack their boards with friends and cronies. So the board’s final decision is not always, well – above board. The Sarbannes-Oxley law took some steps to set rules on this, requiring certain new reporting procedures and holding directors personally liable if shareholders squawk.
You can read the details in the annual SEC filings that typically start rolling in over the next few months. These disclosures often make great reading -- if you have the patience to slog through the legal mumbo jumbo.
The problem is that not all the little goodies stuffed into these pay packages have to be disclosed. So the Securities & Exchange Commission recently proposed rules that would make it easier for shareholders to find out just how much of a company’s profits are being diverted to top executives. (So far, so good.)
Unfortunately, there is little in the proposed rules that would empower
shareholders to do anything when they believe a CEO is overpaid. When it
comes time to vote for new corporate directors, the candidates almost always
run unopposed. Challenging those incumbents is expensive, and your average
outraged shareholder doesn’t have the time or money to take on the company’s
hand-picked candidates. Rare examples of challenges are usually funded by
large shareholders like disgruntled money managers or well-funded corporate
“raiders.” So disclosure of outsized pay, by itself, will do little to
strengthen the link between CEO pay and performance.