Lee Drutman: Sunlight on exec's pay
01:00 AM EST on Saturday, December 17, 2005
When Business Week came out with its annual Executive Pay survey this year, the results were hardly surprising to anyone who had been paying attention. Average CEO pay in 2004 was up another 15 percent -- to $9.6 million -- and nearly 40 executives took home more than $20 million; and that was without stock options!
In short, it was yet another banner year to be running a major corporation. Average worker pay, however, rose only 2.9 percent, to $33,176.
A separate study, meanwhile, found that the percentage of corporate profits going directly into the pockets of the top five executives more than doubled between 1993 and 2003: from 4.8 percent to 10.3 percent.
Such executive-pay plans strike many Americans as excessive. In 1982, the average American CEO made 42 times what the average worker made; now, it's about 400 times. In most other industrialized countries, CEOs earn about 25 times the average worker's pay.
Corporate executives and the boards that pay them do not worry all that much about public opinion. Still, they ought to care what their shareholders think. But many shareholders have little say in what the companies they own pay their executives. No one asks them.
Moreover, many corporations make it very hard to get an accurate picture of what they are paying their top executives.
Instead of clearly disclosing the information in their annual reports, many companies put personal use of a company jet here, a generous retirement plan there, and all manner of perks in all manner of places -- ensuring that even Sherlock Holmes would have a hard time finding all the items in the package.
Recently, U.S. Rep. Barney Frank (D.-Mass.) introduced the commendable Protection Against Executive Compensation Abuse Act, which would require companies to disclose not only the total compensation paid to top executives, but also their compensation policies, to let investors know how those executive-pay packages are decided. In addition, shareholders would be given more rights, including the right to vote down awards such as golden parachutes granted as part of mergers and acquisitions.
The bill is similar to reforms proposed by former Securities and Exchange Commission Chairman William Donaldson -- not exactly a socialist! -- but opposed by the U.S. Chamber of Commerce and the Business Roundtable. They see no reason why such big bucks should not keep flowing to the top.
More disclosure would be a useful first step in shareholders' combating out-of-control CEO pay.
Forcing companies to fully account for their compensation packages would let some sunlight in on a process that too often takes place behind closed doors, amid cronyism, with CEOs' putting their friends on their company's board of directors to ensure generous bonuses. And giving shareholders both more information and more rights to challenge exorbitant pay would enhance accountability.
-- Lee Drutman
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