CEO Pay

The Law of Unintended Consequences is older than Murphy’s Law. The struggle to limit the severance and other pay of CEOs at publicly held companies is an example of this law at work.

In the early eighties, the U.S. economy experienced two recessions, one of them deep, which led to a large number of company mergers and takeovers. Several high profile executive severance packages prompted Congress to enact a change in the tax code, known as a “golden parachute”, that subjected excess payouts to additonal taxes. Executives who received more than three times their annual salary in severance were subject to a 20% tax on that excess income. Before the enactment of this law, most companies paid their executives one year’s salary as severance. After the law passed, companies began to use the “3 times rule” as a benchmark. A study of CEO severance pay in the mid-nineties found that the median payout was two times annual salary. This increase in severance pay was hardly what Congress intended.

In 1993, President Clinton led a populist campaign to limit executive salaries by limiting the deductibility of salaries greater than $1M. Executives at the companies responded by designing pay packages that included stock options. The total CEO pay package grew from 100 times the average worker’s salary in 1993 to 300 times the average worker’s salary in 2000. By 2007, total CEO pay was 344 times that of the average U.S. worker.

I have been involved in several shareholder campaigns to have a greater say in executive compensation. As stock dividend returns decreased and executive pay increased in the past decade or more, the amount paid to executives seemed to come directly out of the dividends paid to shareholders. Some companies have allowed non-binding shareholder resolutions on executive pay but it has been my experience that management traditionally offers little more than a polite acknowledgment to these types of resolutions.

However, Congress would do well to pay attention to history and not make any law or rule that directly limits executive pay. Corporate law is a state issue and I don’t think that Congress could enact any changes in corporate law that would allow shareholders to have a binding vote on executive pay. Perhaps the first move Congress could make is to change the relationship between the federal government and states on corporate law. Large publicly held corporations typically incorporate in whatever state affords them the greatest operating flexibility. Unfortunately, this flexibility allows management to disregard the wishes of a majority of the owners, the shareholders.

2 thoughts on “CEO Pay

  1. eirwenes says:

    Yeah, and the gross inequities at Rhythms and WorldCom. I think what we are all feeling is resentment that these super salaries don’t reward actual work done, or any kind of measured accomplishments or success!

    Like

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