Corporate shareholders should soon have the legal right to weigh in on the compensation packages public companies award their top executives. "Say on pay" would tamp down executive greed and force directors to link pay to performance.
Although Mercer Human Resource Consulting's annual study of CEO compensation reported the encouraging news that more than half the chief executives at large U.S. companies received performance-based equity shares last year, it also noted shareholders' frustration that companies have been slow to rein in executive pay. According to the Institute for Policy Studies, members of the Business Roundtable, the powerful association of CEOs, saw their pay envelopes swell by 10.6%, nearly tripling the raises doled out to white-collar employees.
Chicago-area companies have recently defended their fair share of pay controversies. Take Motorola Inc., for example. CEO Edward Zander pocketed $15 million in 2006 while preparing to lay off 3,500 workers and slashing prices in response to competitive challenges from rivals Nokia and Samsung. The company went on to lose $181 million in the first quarter this year.
Or consider United Airlines' parent, UAL Corp., which just reported a first-quarter loss of $152 million. The airline paid Chairman and CEO Glenn Tilton $39.7 million in 2006, UAL's first year as a stand-alone company after cutting its workforce by 25%, jettisoning its unfunded pensions and emerging from three years of bankruptcy protection.
On April 20, the U.S. House of Representatives voted 269-134 to give shareholders a non-binding "yea" or "nay" vote on executive compensation. The bill's Democratic sponsors successfully argued that shareholders deserve to be heard, especially in egregious cases where companies are losing money or laying off workers while funding the exorbitant lifestyles of executives on whose watch the company faltered. Now the legislation moves to the Senate, where its passage is likely despite the objections of most Republicans.
The bill's opponents cite the Securities and Exchange Commission's recent move to make corporate pay packages more transparent and insist that Congress stay out of corporate affairs. They also fear that giving shareholders a voice in compensation decisions might empower activist investors to unfairly promote their parochial social or political agendas.
But the SEC's newly mandated disclosures often run dozens of pages, losing transparency in a fog of footnotes. And the bill wouldn't cap or rescind any executive compensation or diminish any board's authority.
What an up-or-down vote would do is make boards more accountable to shareholders, as majority voting for directors becomes more widespread. And, for the first time, CEOs would justly face scrutiny by shareholders who demand that boards no longer reward incompetence or failure.
Marc J. Lane is the President of The Law Offices of Marc J. Lane, a Professional Corporation, and of its financial-services affiliates. He is a business and tax attorney, a Master Registered Financial Planner, and an Adjunct Professor of Law at Northwestern University School of Law.
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