Corporate Governance and Shareholder Compensation

The NYT recently did two stories on executive compensation; one that discussed the amount of executive compensation paid in 2014, accompanied by the tag line "Cry if you want to, but C.E.O.'s paychecks are only getting bigger" and one on Say on Pay, with the title noting that "Shareholders' Votes Have Done Little to Curb the Festivities."  In other words, the articles addressed escalating pay and shareholder inability to stem to upward tide.

The article on executive pay chronicled the obvious:  The inexorable upward direction of executive compensation.  As the piece determined: 

  • At public companies with market values of more than $1 billion and that had filed proxies by April 30, the average package for the top 200 best paid chief executives was worth $22.6 million, trumping last year’s average of $20.7 million, and the median was $17.6 million. Those are the highest amounts since Equilar began keeping track in 2006.

Moreover, the statistics established some new records.  Id. ("For the first time, all 10 of the top-paid C.E.O.s on Equilar’s list received at least $50 million last year.").  The article noted that pay had increased despite "sustained efforts to restrict excessive executive compensation." 

The other article discussed say on pay and largely concluded that it had been a failure in reigning in executive compensation.

None of this is particularly surprising.  Say on pay for example is not an invention of the US.  It has been in place overseas (particularly in the UK) much longer.  The evidence from the UK is that say on pay does not exert downward pressure on the amount of compensation.  It instead mostly causes a restructuring of pay so that more compensation is based on performance (such as increased reliance on equity based compensation). In Britain (and other countries), the failure of say on pay to reign in the amount of compensation has not gone unnoticed and has resulted in second generation statutes that give shareholders something more than an advisory vote.

Providing increased teeth to say on pay in the US is one possible approach.  Another is to limit compensation by "shaming" officers through increased disclosure.  Dodd-Frank required disclosure of the ratio between CEO comp and the median employee and required disclosure of compensation versus performance.  Both could have this effect.  

Nonetheless, their impact is unlikely to be felt anytime soon.  The SEC has proposed rules in both areas but is apparently not in a hurry to adopt them.  The pay ratio rule has been pushed off until the Spring of 2016 and may get lost in the run-up to the election.  Pay verus performance does not even have a projected date for completion.  

There is a way out of this mess and that would be for the Delaware courts to impose a more exacting set of standards on boards when determining executive compensation.  If directors confronted a greater need to justify the amount of compensation (and the prospect of liability of they failed to do so), there would be downward pressure on the amount.  But in a management friendly jurisdiction, that is not likely to occur.

To the extent that compensation does not come down, or at least the rate of increase does not moderate (either because shareholders do not do enough to pressure management or boards simply remain impermeable to these efforts), the issue will eventually become a political topic that will be addressed in Washington DC.  When this occurs, the outcome will determined not by the interests of managers and owners but by the interests of voters.  Both groups may be unhappy with that outcome.  

J Robert Brown Jr.