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--- Begin Message --- -Caveat Lector- Capping Pay Of CEOs Is the Way to Go
By Steven Pearlstein
Washington Post
September 19, 2003
You knew it had to happen.
No sooner had poor Dick Grasso announced his resignation than the hounds immediately turned on the "real" culprits in this latest excessive-pay scandal, the board of directors of the New York Stock Exchange. After all, either these pillars of the financial community were guilty of astonishingly bad judgment in approving Grasso's $188 million deferred compensation package , or they didn't understand it and were fools to vote for it anyway.
According to the standard protocol for such scandals, it's only a matter of time before the board's chairman and members of the compensation committee will have to resign, just before the whole lot of them are summoned before some outraged congressional committee. Then poor Arthur Levitt or John Bogle will be recruited to head a blue-ribbon panel to come up with a new governance structure -- one that separates the exchange's profitable trading functions from its regulatory ones, which everyone will agree never should have been combined in the first place.
This focus on governance, transparency and eliminating conflicts of interest is fine as far as it goes. But two years after Enron broke into the national consciousness, I'm coming to think that it doesn't go far enough.
As Warren Buffett warned earlier this year, the litmus test for corporate reform is executive pay. Excessive pay warps the judgment and the ethics of executives while isolating them from the employees they are supposed to lead and the shareholders they are supposed to serve. It is the original sin of corporate malfeasance, the crown on the head of the imperial CEO.
While the structure of pay packages is getting better -- General Electric announced a fine new policy this week -- the level of pay remains needlessly high. Aligning executive pay with the interests of long-term shareholders is only part of the challenge. The other part is aligning it with the pay of everyone else.
It should be obvious by now that we can't expect executives to take a meat ax to their own pay -- or for that matter, the pay of executives of companies on whose boards they sit. Is anyone surprised that Viacom President Mel Karmazin (2002 estimated compensation: $72 million) didn't even flinch when presented with Grasso's now-infamous contract? Or other NYSE board members such as Bear Stearns's James Cayne ($30 million), Merrill Lynch's E. Stanley O'Neal ($15 million), or William B. Harrison Jr. from J.P. Morgan Chase ($13 million). For these guys to have raised a fuss would have required them to question the reasonableness of not only their own pay, but that of everyone in the room.
The only way to get executive pay back to reasonable levels is for the public to demand it. Passing a law is definitely not the way to go. Passing strong shareholder resolutions is.
I call it the 1-1-1-1 plan. The idea would be for institutional shareholders to launch a campaign putting the same resolution before shareholders of the 100 largest corporations. It would limit annual executive pay to $1 million in salary and fringe benefits, $1 million in performance-based bonuses and $1 million in restricted stock, with no more than $1 million to be paid in any year after an executive leaves the job. The caps would be in effect for five years. Directors who ignored them would be targeted for removal.
Such shock treatment would overcome two obstacles to executive pay cuts.
Because it would affect all the top companies, it would end the arms race that companies use to justify sky-high pay, arguing that if they don't offer it, their guys will be lured away by companies that do.
More important, the temporary caps would wring out of the corporate culture the set of norms and expectations that developed over 20 years, and got us to the point where $5 million a year is considered the minimum wage and it is common for chief executives to be paid 1,000 times the average American worker.
CEO pay is obscene and no tinkering with the corporate governance process is going to fix it. Its time for Plan B.
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