Too bad shareholders aren't pay czars
Many people are furious over the rich pay packages enjoyed by corporate executives. But some are also upset that the government has capped pay for some of them. Commentator Susan Lee says the pay czar is doing what shareholders should be able to do.
Commentator Susan Lee (Courtesy of Susan Lee)
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TEXT OF COMMENTARY
KAI RYSSDAL: There are, very broadly speaking, two schools of thought on those rich pay packages a lot of Wall Streeters get. Either people are really mad that they even exist, or they're angry about the government's decision to limit them.
Commentator and economist Susan Lee thinks the anger on both sides is misplaced.
SUSAN LEE: OK, I get it that people are upset about the government's pay czar setting compensation. But I also get it that there's a pretty good reason for it.
These companies, after all, took government bailout money. That gave the government an ownership stake, and owners have a right to determine pay.
Now, this all seems like a no-brainer, until we consider the ultimate owners of these companies: the shareholders. Do shareholders have the right to set executive compensation? Well, no. Absolutely not.
Worse, shareholder-owners don't have the power to set pay at companies who haven't taken bailouts.
Here's how it works:
The power to set compensation is in the hands of the company's board of directors. And a majority of these boards, at a majority of American corporations, is made up of friends of the CEO or other CEOs.
Because there's honor among thieves, it's very unusual for directors to rein in huge pay packages -- especially since the money doesn't come out of their own pockets.
Now, Congress has tried from time to time to remedy this lopsided balance of power. Recently, the House passed a bill requiring boards to hold a shareholder vote on executive comp. But the vote would just be advisory. It wouldn't be binding. And so boards would be free to ignore it.
And that's actually what happened in the U.K. last year. A majority of shareholders voted against the pay packages at Royal Dutch Shell. But the board awarded the money anyway.
So, if you want to enjoy some righteous anger, then I suggest you focus on the inability of shareholder-owners to determine pay. It's part of why we're stuck with so many overpaid, under-competent corporate chieftans.
RYSSDAL: Susan Lee is an economist in New York City.
Comments
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From IL, 11/03/2009
The current disfunction of corporate leaders compensation versus performance is likely to continue until individual shareholders can have an affect on the system. Unfortunately it is more broken than most believe. The future may be torches and pitchforks for us all.
From FL, 11/03/2009
This idea of giving the shareholders the power to vote for compensation caps is merely an illusion. The majority of shares are owned by the big guys or their friends, and guess how they're voting. A few companies here and there might run into trouble, but for the most part these crooks will continue to get rich, sharholder vote or not.
From Papillion, NE, 11/03/2009
Susan Lee is rightt on with her comments about pay. I've probably voted no to every compensation proposal I've seen on a stockholder vote.
But like some other folks have commented until the votes of stocks held in mutual funds are trickled down to the fund holders there probably won't be any change. I see the fund managers as implicitly if not explicitly in the same group.
I'm beginning to see WarrenBuffet as the world's largest mutual fund manager but the only one with a compensation package that is reasonable and a focus on the long term not a quarterly vision.
From Cedar Park, TX, 11/03/2009
What is often over looked are share holders who own mutual funds or ETFs. We are not allowed to vote. Instead the big financial companies cast votes in their own interest. Barney Frank needs to make sure all share holders have a chance to vote.
Thanks Bobby Dunn
From Bethel, CT, 11/03/2009
Good commentary. It is the shareholders whose money is at risk; it should be a matter of course that they have the major say in how the returns are distributed.
From Los Angeles, CA, 11/02/2009
"A majority of shareholders voted against the pay packages at Royal Dutch Shell. But the board awarded the money anyway." Shareholders elect the Board of Directors. Why haven't the majority of shareholders simply voted in a new Board of Directors? Do you think they will do that during the next election? Is there any reason shareholders cannot change the Board of Directors?
From Roswell, GA, 11/02/2009
Richard: If that same attitude were displayed by liberals at the ramblings of Limbaugh/Hannity/Boortz et al, then I accept it. But many listeners of your program do not differentiate when a non-news-reporting right-winger pontificates, so why do you expect that when a liberal opines?
From San Diego, CA, 11/02/2009
Why don't we just link executive pay to average worker pay like they do in Europe and Japan? Then the middle class grows & so does the economy. Tens of millions of middle class folks will spread the wealth more than those obscenely rich ever will. You'll still have rich CEO's but probably a lot fewer crooks!
From Perryopolis, PA, 11/02/2009
The notion of shareholders in common is itself a fraud perpetuated up by barons like Commodore Vanderbilt to create paper wealth for themselves. Whenever a board of directors rejects shareholder proposals they are in effect saying "sorry sucker". However, too much of Americans net worth is now tied up in fraudulent securities. The American Culture of Financial Corruption has to contend with the fact that you can get away with defrauding a minority, but when you try to con an entire society you risk the uncontrolled rage of the masses. One day some of these crooks and criminals running Americas financial institutions may end up lynched by a crowd of angry shareholders. Good riddance.
From tampa, FL, 11/02/2009
great summary. I have been an investor much of my adult life and had no realization that the answer was indeed that simple.
From Los Angeles, CA, 11/02/2009
Doug,
It's a commentary. The opinions are those of Susan Lee.
From Roswell, GA, 11/02/2009
"Because there's honor among thieves"? For an obviously biased public organization that tries so hard to hide its anti-capitalist petticoats, your slip is showing.
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