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"Say on Pay" a Boon for Advisors, but for Shareholders?

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Calstrs, the outfit that oversees some $111 billion of teacher pension funds in California, is now demanding that companies allow shareholders to vote on executive compensation (say-on-pay), and it has set out eight pages of guidelines seeking "more responsible executive pay policies." It is not alone.

Shareholders are becoming downright feisty
Just ask Ken Lewis. Bank of America's (NYSE: BAC  ) CEO was recently dumped as head of the company's board when stockholders backed a proposal to split the chairman and CEO roles. He's not the only executive feeling considerable heat, and darn little love.

Shareholders of Royal Dutch Shell (NYSE: RDS-B  ) may well vote down the company's latest compensation plan since it abrogates the policy previously set out by the board. The board is awarding management a bonus even though Shell lagged the performance of rivals ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , BP (NYSE: BP  ) , and Total (NYSE: TOT  ) -- the comparison explicitly meant to determine pay.

Stoking outrage against CEO compensation has been the widening gap between wages for the assembly-line worker and those in the corner office. According to The Economist, in 1980, executives were being paid on average 40 times more than an average production worker. By 1990, the ratio had doubled, and by 2003, the comparison was 400 to 1.

To a large degree, this divergence reflects the impact of a shift toward greater use of common shares and stock options to reward executives -- a practice meant to align the interests of management and investors -- and a buoyant stock market. Clearly, the market collapse last year will have shifted these trends.

Here to stay
Still, shareholder anger about former excesses, and the demand for say-on-pay, is not likely to disappear. Since May 2008, when shareholders of Aflac (NYSE: AFL  ) become the first group to vote on compensation, the number of companies offering investors a non-binding vote on compensation has risen rapidly. Moreover, the practice is likely to become law.

Senator Charles Schumer sent a letter to colleagues on April 24 saying he would soon introduce a bill requiring that investors be allowed to vote on executive compensation and golden parachutes, and also demanding that the roles of chairman and CEO be split. There is no doubt that President Obama supports greater shareholder involvement. In 2007, he introduced a similar bill in the Senate.

Will shareholders have increasing clout in the management of publicly owned corporations? Should they? Do they care?

Maybe, maybe not
Critics of say-on-pay argue that shareholders are not in a position to judge the merits of compensation agreements, which are complicated and often misconstrued in the press. The media tends to report a single number, whereas pay often reflects awards from prior years that are finally vested or that were originally deferred.

Some managers argue that in any case, the current approach is too blunt an instrument. What does it mean if shareholders vote against a particular company's policy? That pay was too high? That perks were too generous? They don't like the golden parachute? Perhaps this is irrelevant, in that the message investors want to send is simply dissatisfaction with management. Still, as the compensation process has become more complex, the simple "up or down" vote is not seen as particularly useful.

Opposition to say-on-pay from the business community also focuses on the inability of shareholders (or their advisors) to judge the subtleties of how compensation is determined, not being privy perhaps to competitive issues or to the alternative opportunities available to individuals.

For instance, RiskMetrics, a prominent advisory firm, opposes multiyear contracts. Realistically, though, if a company wants to hire sought-after talent from across the country, you can bet he or she's going to demand more than a one-year contract. Detractors also point out that revealing increasingly detailed information about how compensation is awarded can weaken a company's competitive position. Further resistance stems from the notion that once emboldened to vote on pay, shareholders may press for influence in other realms, such as hiring policies or outsourcing. The bottom line, according to some executives, is that shareholders already have two means to express dissatisfaction: They can vote against directors, and they can sell their shares.

This Fool's view
Shareholder activism has already effectively eliminated the old "buddy boards" that were often behind excessive remuneration. It seems to me that boards today are already on notice that compensation must be based on performance.

The threat from say-on-pay is that it could (ironically) exacerbate an unhealthy focus on short-term results, a preoccupation that is already promoted by the growing marketplace power of hedge funds. Though board compensation practices will theoretically be based on multiyear trends, (and indeed the Calstrs guideline emphasizes "long-term thinking") shareholders will just as surely respond to the last year's results and vote accordingly.

Managing for short-term objectives, as we have seen with the auto companies, hurts not only companies but society at large.

It also seems to me that boards, and compensation committees, are required today to spend so much time checking boxes and seeing to the increased governance required by Sarbanes-Oxley and other measures seeking to correct past errors that they end up having little time to focus on the big picture. Maybe if AIG's board had been paying attention to the build-up in its CDS portfolio, the company would not be in today's drastic condition.

One thing is for certain. Say-on-pay is coming, and it will be a bonanza for advisory companies like RiskMetrics. Shareholders will be expected to make sense of the increasingly complicated compensation arrangements; many, no doubt, will seek help. It is not, in my view, good news when legislation fuels a boom for companies whose job it is to unravel legalese.

For more compensation Foolishness:

Fool contributor Liz Peek owns shares of Chevron and Bank of America, but no other companies mentioned. Total is a Motley Fool Income Investor recommendation. Aflac is a Stock Advisor selection. The Fool is investors writing for investors.

Read/Post Comments (26) | Recommend This Article (32)

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  • Report this Comment On May 07, 2009, at 5:10 PM, edgargerman wrote:

    1. The small investor has no effective vote. The large investors (pension, hedge funds) overwhelm what we think and there obviously is a lot of information flowing between the large stockholders and the management.

    2. There should have been no bonus for executives of companies that did not make a profit. At least some of the executives of failed companies should be put on trial for failure to perform and many should forfeit any bonus received for the preceding year.

  • Report this Comment On May 07, 2009, at 5:11 PM, AustinAndy wrote:

    Cisco shareholders vote on executive compensation and I do not see that the Chairman has not suffered from penury. It is a good idea and gives shareholders some say. If the buddy boards were gone, then the Country Wide and Merrill Lynch boards would not have compensated the CEOs of those corporations with any bonus. Did not happen.

  • Report this Comment On May 07, 2009, at 5:16 PM, estebanlr wrote:

    That is a useful article. But it makes me realize so much of how "executive" compensation arrangements evolved is just ridiculously unnecessary.

    I cannot rationalize one good reasons for not making compensation a simple, straightforward, transparent and easy for ANYone to understand process. Then, if that number is big dollars, it would be a simple process to determine if performance is worth the salary …or not.

  • Report this Comment On May 07, 2009, at 5:24 PM, Royzo wrote:

    Just back from the Berkshire annual meeting - Warren says compensation committees are intrinsically corrupt (my translation) and he doesn't and wouldn't use them. For those of you who don't know, Warren has always said that CEO compensation is a scandal. His and Charlie Munger's compensation is $200,000/Yr, so his opinion has clout. I say any CEO worth a janitor's wage can invest his own money in his company and become a billionaire like Warren. That is shareholder money that they're TAKING. And we are not getting "the best and the brightest", so let's not allow them to advance the myth that they have found them or even know how to do so.

  • Report this Comment On May 07, 2009, at 5:32 PM, mitchellprof wrote:

    Institutional shareholder activism is a major cause of short-term managerial myopia. In my recent book, The Speculation Economy: How Finance Triumphed Over Industry (2007), I wrote the history of the early modern stock market, demonstrating that it had its roots as a speculative market rather than as a long-term investment vehicle, and that those early roots dominate the market today. In my earlier book, Corporate Irresponsibility (2001), I argued that shareholder pressure was increasingly pushing management to the short-term.

    More than that, public shareholders have, throughout the history of the modern market, taken more out of American corporations than they've put in. My empirical work shows that at almost no period of our history has public equity provided significant financing for productive uses. See my The Legitimate Rights of Public Shareholders, available at, and Who Needs the Stock Market?, available at Moreover, the investment styles bred by modern finance theory practically beg stockholders to speculate without any concern for the underlying businesses, See my article, The Morals of the Marketplace, available at

    The point is that public shareholders should have less, not more, say in the running of American industry. The so-called age of managerialism during the middle of the 20th century was the greatest period in history for real American productive industry. Leave management to the managers, not to the shareholders, whose sole goal is to push up share prices at the expense of the long-term creation of real wealth.

  • Report this Comment On May 07, 2009, at 5:33 PM, TMFSelzhanik wrote:

    On Saturday during the Berkshire Shareholders meeting, Buffet made some interesting comments concerning the effectiveness of legislation when it came to controlling the behavior of a business. My take-away from the discussion was that regulation is not going to be effective, but incentives could have a positive result. I'd be more specific, but I don't have my notes in front of me.

    As an example of ineffective regulation, he referred back to the times of the Clinton administration, when Congress passed legislation limiting executive compensation. The response was to simply shift executive compensation to harder-to-document things like stock options. Of course, when a company's stock price soars, executives can cash in those options, and what may have seemed like reasonable compensation when the options were awarded years ago becomes some ridiculous number later. It also gives executives a strong incentive to focus their efforts on pumping the stock price up, if just for a single period in time, in which they have the ability to cash out. Effectively, the legislation made the problem worse.

    The bottom line is that a company's leaders (board of directors in the CEO's case) are going to be the best judges of what executive compensation should be, at that particular company. If they set it too low, they lose those executives, and suffer the consequences. If they set it too high, they lose a good bit of money, and the executives probably leave anyway upon cashing out, and they suffer the consequences. Either way, the leaders of the company are responsible for, and publically accountable for, the success of the company. As a shareholder, I don't want that responsibility.

    For me, as an investor and thus a potential owner, evaluating a potential investment in a company must include evaluating whether or not the board and top executives take that responsibility seriously.

    I'm certain the general public is going to get behind legislation that tries to limit executive pay. Obama's ability to incite a crowd into a frenzy is unmatched. And how easy is it to get people upset about multi-million dollar compensation packages for executives whose companies are performing miserably? But I agree with Buffet in that I don't think regulation will be effective.

    Now, I also agree that compensation for these executives in general is way too high. But my solution to that is simple -- I don't own those companies. And thus, the only effect it has on me is to make me a little jealous -- and that's my own sin to deal with.

  • Report this Comment On May 07, 2009, at 5:36 PM, TMFSelzhanik wrote:

    Wow, please forgive the bad spelling in my comment above. Am I talking about Warren Buffett, or a lunch time buffet.

  • Report this Comment On May 07, 2009, at 6:08 PM, jc09058 wrote:

    Reading this article caused a lot of mixed emotions when trying to be fair and objective while evaluating the concepts of pay, golden parachutes, options and all other perks. I don’t think there is any one without an opinion on this subject today and most negative when considering what can to light over the last six months. Sadly, I’m more in line with shareholders wanting to have a say in executive perks because of the very excesses that occurred over the last 25 years. I can remember many times my father grumbling about executive pay and how excessive it was back in 1983.

    One the issue of complexity of perks and how shareholders wouldn’t be able to understand them, I would disagree having worked for major corporations and seeing how senior executives got their perks. More importantly, that complexity issue is a weak argument because the answer is nothing more than tying it to the book value of the company and nothing else. Ignore the share price or earnings per share because both can be manipulated by speculation or management ‘correcting’ the books.

    While we are at it, let’s put some negative consequences in there as well. There has many executive and board member that has looked at year end reports and said “Well, that could have gone better” or “Maybe, we should gotten out after all because of what we saw earlier in the year”. I have heard both statements used before. Too often, executives will continue with a bad plan because they never looked for an alternative, had an exit strategy or said “don’t worry; it will get better in the second half of the year”. Like the market, you look for good value and if you did all of your homework correctly, you get rewarded for your ‘risk’. If you don’t do due diligence, then you have a negative reward of losing your money.

    I have nothing against perks if they are managed well and have a fair distribution. Just remember senior executives and Board member, the shareholders want their cut too. Why, because we are the owners and as an owner, the lion share should go to the business (not the Board, CEO or employees), then come the shareholders (owners) and finally the employees (Board, CEO and employees). Just like any other real business out there.

    I will put it like this, as it was told to me by my boss once, you may be a shareholder but first you are an employee. Whether you are on the board, the CEO, or just a regular employee, you have a job to do to keep this business running and it must be done. They (the CEO and Board) are doing their job for the company but meeting with the owners and reporting to them how we, the Board, CEO and employees, have done last year managing their business.

    I think they were wise words and none truer spoken. Now, if the Boards and CEOs will start listening and understanding their real position in relation to the owners.

  • Report this Comment On May 07, 2009, at 6:42 PM, DPMuller wrote:

    Dear Liz,

    Did you just say that "Shareholder activism has already effectively eliminated the old "buddy boards" that were often behind excessive remuneration." ???

    I have no idea what boards you are talking about, and honestly I believe you just made this statement up, as the board compositions and compensation plans are essentially unchanged and still wide open for abuse.

    Due to the current regulations which are heavily stacked in favor of the executives / existing board members, today's boards are mostly cronies of the management, and until meaningful reform happens they will stay that way. For every succesfull proxy battle, there are many many lost or not even attempted ones.

    Please, show me that I am wrong by using meaningful dasta and statistics (not one or two "success stories"), and I will apologize, but in the meantime you might refrain from commenting on shareholder representation issues...

  • Report this Comment On May 07, 2009, at 7:01 PM, robertf36009 wrote:

    Let's recap: Buffett thinks that commties are corrupt/corruptable and legislation will lead to creative financing to obtain the desired results. Some executives make a sallery 400:1 of floor workers. What does that leave as control? Immelt at GE has run the compny into the ground but remains the CEO. Why? He undoubtedly controls the board and assigns his own sallery. I noticed that team Obama said nothing to him while threatening or firing other CEOs at firms that got TARP money as did GE. So now the culture of coruption is at the level of the nation's CEO because he (Immelt) was appointed to the presidential economic advisory body. Why? certainly not because of superrior performance. I won't buy GE while Immelt is at the helm because I must trust the management at the companies I buy into. That means that share holder say in pay would be the ultimate check on this type of curruption but should be implemented by share holders not Schumer or Franks (who should both be prosecuted along with Immelt.).

  • Report this Comment On May 07, 2009, at 7:03 PM, Royzo wrote:

    I would prefer a legislated limitation on compensation of the highest paid employee of a public company, but I'm uncertain of the legal soundness of my favorite scheme. I like one something like this: The highest paid individual's total compensation (adjusted for the proportion of the year employed) may not exceed 50 times the hourly rate X 2080 of the lowest paid (and here I'd prefer part time and temporary employees worldwide, and the multiplier is arbitrary) employee, including options and bonuses. All "perks" unavailable to other employees will be included as compensation at assessed valuation. Any golden parachutes must not exceed 25% of the highest annual compensation received and any pensions awarded must be awarded on the same basis as the general plan for regular employees. There can be no special plan for higher paid people. Any of the "best and brightest" whose superlative talents are too special to allow them to be attracted to these positions are welcome to start there own private companies where we will anticipate that they will generate Warren Buffett-like results!

    Incidentally, at the Meeting Warren said, commenting on a ? regarding his evaluation of derivatives as "financial WMDs" vs his own uses of them, that they tended to entice smart people to engage in complex schemes which turn out like AIG & Enron. He then said that average people make the best investors, and "if you have a 160 IQ everything over 120 is wasted." You'll just do some intricate thing with unknown elements and make a mess of it.

    I hope you enjoy my scheme.

  • Report this Comment On May 07, 2009, at 7:29 PM, FalseRuler wrote:

    In reply to all above:

    I am looking for more transparency and honesty in the executives. I tired of seeing them as BARONS who greedily take and fail to give little. The workers seem to be the peons to do the dirty work and only take home te dirt pay and thanks they receive. Reminds me of the OLD FEUDAL SYSTEM.

  • Report this Comment On May 07, 2009, at 7:33 PM, peters46 wrote:

    Government regulation under Obama? They just took away shareholders' votes on option plans, bonuses, etc. How? They passed a rule or law that says companies must allow an ADVISORY vote on such plans, whereas before the companies put forth the plan as desired and allowed a shareholder vote, and the board/company had to follow the vote. Now they can just ignore the vote. When these plans started to give away two to five percent of the company each year as bonuses, I started voting against them. Who passed them? Individual shareholders who didn't want to bother reading them, and mutual funds.

    In the '80s I read the same thing - executives (in the US) were being paid 40 times what the average worker was making. In Europe it was 25 times the lowest paid worker. Congress decided to fix(?) that making any pay over (I believe $1,000,000) was not allowable as a business expense unless it could be tied to reaching goals (which, in any case, did not have to be meaningful). If you read the compensation plans put forth, you would know what I mean - think creative obfuscation. Yes, most plans had some reasonable goals, but the executives only had to meet one or two goals out of five or six. (Can you smile three times a day, three days a week, 30 weeks a year?) No, I did not see that goal, but many others were just as foolish.

  • Report this Comment On May 07, 2009, at 8:06 PM, xetn wrote:

    I think this is all a ridiculous argument. On the one hand, you all seem to be jealous of the management compensation as if that directly affected you. I don't think most managements are worth the money they are paid, but then neither is Obama worth the over $55 million in compensation he receives (if you add in all his benefits of a private jet, helicopter, white house, staff, security, etc.) To say that he only gets $400K per year is greatly understating his total compensation just like a manager's salary greatly understates his comp. The main point I would like to make is this: if you don't agree with the way managers are paid just don't invest in their companies. If the management teams don't provide increased value in their businesses they will fail with or without your votes or any legislation. Additional legislation is just a smokescreen for more socialism at the federal level and a knee-jerk response to the public. Lastly, if Merrill, AIG etc never received the bailout money, how much bonus money would have been paid? Try zero; they didn't have the funds. So, you the taxpayer/citizens of the US are picking up the tab for a stupid government policy of "too big to fail". NO ONE IS TOO BIG TO FAIL!. The best policy is to let bad companies go bankrupt. That is why we have bankruptcy laws. Trying to prop up failed business is just a giant drain on the economy.

  • Report this Comment On May 07, 2009, at 8:47 PM, enginear wrote:

    Things have gotten out of hand - mostly within my lifetime I think (I'm 56) - and they seem to have accelerated in the last 20 or so years. Compensation for the top dogs has gotten too complex, and too far above the common man's.

    Did anyone other than me notice that the worst financial crisis since the great depression was overseen by more highly trained business degrees (MBA's were a bit rare 25 years ago, and practically nonexistent 40+ years ago) than we've ever had before? This is part of a larger trend. The MBA's in training I've met (and I've met a few) were in it for the MONEY! The on the job training was minimal, because they were hired as experts, which on certain technical issues, they were, but the overall general business experience (including the moral underpinning of it all) was not there, and not being overseen by the old timers, who were happy to see all that technical expertise generating profits (which it did). Robbing pension funds was big game in the 80's - they were all overfunded anyway (but for some reason the PBGC is now running low on funds). Keeping a stable workplace for your employees, or continuing (ongoing) product support that didn't generate gobs of cash would not be tolerated anymore. It was 'bad business'.

    The people making those decisions also decided along the way that it was good business to raise their own salaries (I know, I know... the boards approve compensation, but who sits on boards?... other presidents, CEO's, CFO's and interested - from other corporations - parties), and yes they did say while they were in school that they were in it for the money (and did you ever notice how they thought they were really worth it, too).

    Well here we are 20 or 30 years later listening to them say it's just the marketplace. If you don't pay for the best talent you won't get it. Unfortunately, it has meant we end up paying danged (I almost had to get unrespectful there) knuckleheads that lose money almost as much. If we only paid the good ones good money I'd be happy, but that's not the case. Furthermore, I think there's a competitive spirit in a true CEO that would make him do it for 20 times the low man's salary... they just love doing it! (Unfortunately being a winning negotiator is part of the package, so we end up paying.)

    I say just say no! We have what I believe is a unique opportunity to tell them, in this unfortunate time, 'You did us wrong, and we won't pay you for it any more'. They have had the upper hand for the bulk of my lifetime, and I think it's time for the company owners to bring them back to earth (a little - we will not be able to go as far as I probably would, but maybe I would go too far). I'm not opposed to paying good money for good performance (not at all!), but when the mish mash of options, bonuses based on weird metrics, slippery sliding salaries, golden parachutes, and the like end up rewarding losers, I get a little peeved (especially when it's so difficult to get to the bottom of the whole package).

    I liked the general outline of the highest paid employee guidelines above. You could adjust numbers and fiddle it around a bit, but I generally like the idea.

    I hope some shareholders are listening, and as for those that say shareholder activism is a bad force... so is wanton greed by executives, and it's been in the catbird seat for too long (way too long!).

  • Report this Comment On May 07, 2009, at 9:24 PM, weallseeus wrote:

    i wonder if there should be a clause, on the retirement bonuses, that requires continued effective function of the company for the bonus that was given.

    so we don' t don't get 'dump and run' when the employee sees poor consequences for the company comming.

  • Report this Comment On May 07, 2009, at 10:08 PM, basil409 wrote:

    The status quo that is apparent today evolved and accelerated rapidly during and after the 1980s, then in to the 1990s. To me, it was the foolhardy FASB standard that allowed stock options to be "free" to a company (no expense until exercise). Then, for "competitive reasons" EVERYONE started to get them. The biggest feeders at the corporate trough were executives, especially the job hoppers and "saviors" of companies. The got tons of equity at the front and over time and got all the benefit of the upside and downside protection, especially if they failed (severance/employment agreements) or got someone to give them a mega-grant or reprice their underwater shares. I also think that excise tax gross-ups on termination payments are excessive!

    I am a compensation "expert" and I know a lot about this stuff. If you were to track and understand compensation trend data, you will see how much executive pay went up from the 1980s to today. Median CEO pay is $2.5-$3.0Million per year in the US. Over 50% of that annually is equity and that went up 15% per year in value every year in the 90's. On top of that Base Salaries always went up based on the market moving up 4%+ per year, benefit values grew in tandem and annual bonus percentages also climbed. If an exec caught the waves of the 90's, they became very very rich. That partially explains the high end of the housing boom.

    So, what is happening now? There is a great deal more scrutiny and openness, driven by SEC disclosure rules. Congress will also likely grandstand and get into the act. That's good to some degree, but there is a lot of useless hand waving and grandstanding too. But, no matter what, the elements and value of executive compensation IS hard to understand. The average individual shareholder would have a hard time figuring things out---and once they did (I'll give credit), what would they do with that? How would they decide if pay was too high? what is real performance? I have a few clients who have performed 75th percentile or higher on an operating basis (cash flow, revenue growth, EBITDA growth, Return of Capital, etc.) but their share price went down 25-65%. I would argue they performed well, their equity grants were worth nothing too and there is nothing really to show for it.

    I am not arguing that Warren Buffett may not be right or that there have not been abuses. However, most companies out there try to do this right, meet the highest standards and are more than willing to disclose what they're doing. They actually want their institutional and individual shareholders to understand.

  • Report this Comment On May 07, 2009, at 11:13 PM, jmralph wrote:

    There have been several good points made in these comments, Without repeating all of them, I'd like to offer a proposal that accommodates most if not all of them.

    Let's legislatively, or through tax policy cap executive (and for that matter, entertainers and sports figures compensation at some reasonable number, for purposes of discussion, say $5 million annually. Then we can leave it up to the buddy boards, sports team owners Through their fans' pockets), etc to pay their folks whatever they believe theiy are worth within that limit. This still allows the exec types to get rich, but also protects the small stockhholder from having his company fleeced by the good old boy network. I have no doubt that there is an inexhaustible supply of bright and extremely competent businessmen (and entertainers and athletes)who would perform thier jobs in an outstanding manner for compensation within this limit, because these people, especially those we really want in these positions are motivated by the inherent rewards, not just the compensation. Imposing a limit would put an end to the ever escalating compensation which has become a way of keeping score. Let's face it - noone needs the obscene wealth being showered on these folks. We can keep score in other ways. Anyone not satisfied is free to go be CEO in another country, like Japan, where the CEO of one of the most successful car manufacturers in the world happily does his job for $1 million a year. If we still absolutely need to use obscene compensation to measure people against each other and keep score ... go ahead and allow it to remain unlimited ... just tax everything above $5 million at say 90 or 95%, this allows the prima donnas to retain their bragging rights, while at least returning their excessive compensation to the public good.

  • Report this Comment On May 08, 2009, at 12:28 AM, meddguy wrote:

    I strongly favor say on pay. At the very least,

    shareholders should have a binding vote on 'golden

    parachutes' and similar methods of looting the company.


  • Report this Comment On May 08, 2009, at 1:36 AM, mexicankev wrote:

    The issues may indeed be complex, but count me in favor of shareholders using a blunt instrument. It doesn't take a PhD in Economics to figure out that our CEOs aren't worth 400 times the average worker's salary when those in Japan make something like 50 times (or less?) the average worker's salary. A cult of entitlement has grown and flourished in this country and it needs to end. I'm very tired of hearing about "the best and the brightest" from their corporate flacks in the media.

  • Report this Comment On May 08, 2009, at 7:27 AM, Smithtenn wrote:

    "Say on pay" may be a huge boon to stockholders! Contrary to the thinking that we can't understand the issues, I think there is deliberate effort by the executives and their lawyers to make simple things overly complex. I would argue that simpler is better because most of the owners of the company (the stockholders) can understand quite well what is going on, and can decide if their (the stockholders) company is acting in the best interests of the company.

  • Report this Comment On May 08, 2009, at 9:05 AM, palmj wrote:

    All excellent comments -- but biggest issue is transparency. I have seen very effective use of bonus metrics that are established in advance, with everybody understanding what are the hurdles. If you do not meet a key metric (e.g. 80% of earnings target), no bonus. Simplistic - but more objectivity. Salary is negotiated separately. Bonus should be based on performance.

  • Report this Comment On May 08, 2009, at 11:01 AM, TwinMount wrote:

    I agree with Royzo that public company compensation should be limited. The ability to make obscene amounts of money leveraged on the backs of common shareholders was a major cause of the current economic situation. The Board members who approved these compensation packages only have the excuse that everyone else was doing it. Which reminds me of a group of children reasoning why they did something stupid.

    One of the key issues that is not addressed by current compensation rewards is the fact that many companies that have recently made huge profits did so because of decisions made decades ago. These profits have very little to do with current management and the huge salaries of current management may not be indicative of their contribution. For example the car companies may actually trying hard to do something now but the overpaid executives in the past have created a tough situation, meanwhile some of the resource companies that had record profits last year only had them because of decisions made by past executives. I agree with Warren Buffett that compensation should be kept low and funds should be loaned to executives to purchase shares. Then they are truly aligned with the common shareholders.

  • Report this Comment On May 14, 2009, at 12:47 PM, mpendragon wrote:

    Building a compensation scheme that helps align an executive's interests with the long term success of the company they're overseeing is difficult. Most of the existing methods reward short term performance at the possible expense of the long term health of the company.

    The best method I can think of is a reasonable salary (whatever that is) and stock, but not stock options, that they can't sell for say 8-10 years.

  • Report this Comment On May 15, 2009, at 4:51 PM, gamblegold wrote:

    What we have is nothing less than the post-modern form of slavery.

    In the corporation where my wife works -- because of the current economic 'crisis' -- the company will shut down her division for two weeks during this year. For two weeks, no one in her division gets paid. By the way, her division is the ONLY ONE to have made the corporation (a so-called conglomerate) any profits whatever for the past seven years

    Meanwhile, the jerks at the top, who have systematically wasted money for five years trying to 'economize' voted themselves 2 million dollar bonuses (down from 7 million last year). People go hungry, have no money for food and these $@$% give themselves a BONUS?!!??

    Yes, there should be laws against this. Yes, there does, obviously, need to be imposed controls when the ratio of pay is 400 to 1 or greater. NO ONE needs 20 million dollars a year plus bonuses and perks on top.

    The fact is, the deregulation of corporate behavior has done nothing but rob, rape and pillage the shareholder and the employees. I don't care what Ivy League management degrees they hold -- they are the new slave masters and they only feed their own greed.

    Don't believe me? Take all the excess executive compensation paid over the last decade from just the NYSE corporations and add it together then see what it would have meant to have that money put to work for the shareholder's benefit.

    The 'system' is out of wack. Grossly so. I don't like governments 'controlling' things but something has to be done to stop this and stop it NOW!

    Want suggestions? Okay:

    1) No top-line executive can be compensated at greater than a 50-1 ratio of lowest paid worker (regardless of whether that is full or part time worker) on an hour for hour basis.

    2) No top line executive can earn more than 1.5 million per year (amount indexed for inflation annually) and annual merit raises cannot exceed 25% of the median raise given throughout the company.

    3) No top-line executive can receive more than his/her annual salary in total cumulative bonuses during any single calendar year.

    4) Stock bonus are given with the requirement that they cannot be sold (stock must be held) for a period of 5 years. Of stock eligible for sale, no more than 10% can be sold in one transaction with a cap of 50% per annum (unless family hardship). In the case of termination or departure from employment, the former executive cannot sell any shares for a period of six months.

    5) Total elimination of so-called 'golden parachutes'. Executives that leave voluntarily get no benefits which are not available to all employees upon their departure. Formulate severance for termination as a standard adhered to by and for all employees at the same relative rate.

    6) Complete Elimination of Stock Options as bonus payments.

    7) No 'perk' available to a top-line executive that is not available for any other employee and at the relative same rate. All 'perks' published in annual report.

    8) Absolutely NO BONUS either at the time or retroactively for ANY top-line executive during times of a) reduction in workforce, b) quarterly corporate financial losses, c) 're-structuring', d) wage freezes or involuntary temporary layoffs or for any other form of economic remediation which impacts the rank-n-file employees (in other words, if you're asking your employees to take a hit for the company, the top-line executives better be taking the same or worse hit themselves).

    This may not be comprehensive but it would be a major step in the right direction.

  • Report this Comment On May 28, 2009, at 7:36 PM, Epiphany11 wrote:

    I work in Silicon Valley, home of the new robber baron...which is exactly what the entirely corrupt corporate system has become, as evidenced by the constant spate of corporate rip-offs and failures. There MUST be a change in corporate structure - golden parachuttes should be completely illegal - to reward failure is just plain wrong. These corporate executives are already grossly wealthy and should NEVER be rewarded for doing a bad job. Your article is so off-base to the real world that I work in. I have seen instance after instance where executives are rewarded for being "the guy that V.P. so-and-so went to college with," rather than for solid performance. It's a joke. And I can't count the number of times where some executive made tens or hundreds of millions of dollars...for being in the right place at the right time, NOT because of brilliance. The world, it is a-changing and for these people to make hundreds of millions of dollars while the rest of the nation continues it's silde into poverty - is JUST PLAIN WRONG AND WE'RE NOT GOING TO TAKE IT ANYMORE! Email and write your legislators that the rape of America by greedy corporate executives must come to an end!

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