Investors who care about a functioning marketplace should be concerned about corporate America's glut of underworked, overpaid executives. When managers' performance and merit seem to bear no relation to their compensation, you know we're still living in a rotting, stumbling zombie economy.
Not fair, not free
Today, White House pay czar Kenneth Feinberg said that from October 2008 through February 2009, 17 major financial companies that received bailout money from the government subsequently overpaid their executives. Goldman Sachs
The review found that $1.6 billion of the funds those 17 companies shelled out would have been violations of pay guidelines later put in place. Feinberg also said it wouldn't be "fair" to claw back the money now. Alas, he's talking not about common sense, but about the legality of violating contracts, which could trigger lawsuits against the banks and allegations of government overreach.
Still, that doesn't make such financial companies' behavior any more ethical. In response, Feinberg has pushed the companies to adopt policies that would better reflect appropriate behavior during crisis times, like allowing compensation committees to slash compensation to top dogs. However, his proposal is voluntary.
Naming the enablers and constrainers
There's plenty of blame to go around for all of this. For one thing, politicians should have outlined strict stipulations for how public funds would be used when they were bailing out these sorry suckers to begin with.
More importantly, shareholder apathy, especially among big institutional investors, helped to sink us so deeply into this mess. In 2008, the average CEO's compensation was 319 times that of the average worker. Somehow, I doubt that many CEOs were kicking that much butt. Institutional investors could have pushed back when they saw that disparity, but they didn't. Fortunately, it looks like some of them may now be waking up.
A recent report released by the American Federation of State, County, and Municipal Employees (AFSCME), The Corporate Library, and Shareowners.org outlined "pay enablers" in the mutual fund realm. Its top culprits for 2009 included funds run by Barclays, Northern Funds, State Street, and Vanguard. (Ironically, retired Vanguard founder Jack Bogle has been very outspoken about how mutual funds should have put a stop to CEOs' outsized compensation.)
The mutual funds most likely to administer a pay smackdown were associated with Schwab
The rate at which mutual funds supported management's compensation schemes remained unchanged from 2008, at an average rate of 84%, but there's a glimmer of good news. The average rate of support of shareholder proposals for controlling compensation levels increased to 56%, from just 40% in 2008.
Fight back against mediocrity in the marketplace
Corporate managemers and boards of directors who felt entitled to bubble-era pay on the taxpayer dime are poor allies to investors, and to a healthy marketplace at large. They were simply out for themselves, regardless of the destruction they caused. I'm a huge fan of freedom, but I also recognize plenty of behavior may be legal, but just isn't right.
Wards of the state that doled out big bonuses -- the kind of outrageous behavior that garnered AIG
Whether it's funded by taxpayers as a whole, or shareholders in particular, high pay for weak performance must stop. If you favor generous CEO pay on free-market principles, and condemn the government for wasteful spending, you ought to recognize that letting entitled corporate bosses rake in millions while performance suffers is no more efficient or effective. The same bureaucracy we condemn when it gums up the government gears occurs too often in the private sector as well.
To fix this, we need to get tough on ineffective managers and weak boards, and only approve high pay for true high-quality performance. Outsized pay minus true operational merit equals mediocre performance -- and investors will end up losing big-time in that equation, too.
It's high time we shocked this zombie back to life -- or aimed for the brain and put it out of our misery.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
