Growing Sense Of Outrage Over Executive Pay
Saturday, November 15, 2008
NEW YORK -- The public's indignation over lavish executive pay has rippled beyond the circles of activist investors and corporate governance watchdogs, who for years have wrung their hands over compensation practices. It has spread even beyond grass-roots community organizers and public policy think tanks to people who make their living in the financial industry, like money manager William Fitzpatrick.
"This is a topic that doesn't really get a whole lot of attention during more benign economic times, but clearly this is something that really got away from us. As a profession, we really kind of fell asleep at the switch here," said Fitzpatrick, who helps oversee about $1 billion at Optique Capital Management in Milwaukee.
Compensation is being scrutinized as never before, especially on Wall Street, where the year-end bonus season is coinciding with a government bailout of finance companies. At a time when the average taxpayer already is feeling stretched, public money is being used to support an industry that paid out $33 billion of bonuses last year. Wall Street itself blames the compensation system for playing a role in the credit crisis by encouraging excessive risk-taking.
Fitzpatrick said there is little he, or his small investment shop, can do to stop the current crop of executives from pocketing every cent promised in their employment contracts. But he expects the runaway pay problem to work itself out, as chastened boards cut more modest deals with the next batch of hires.
Dallas money manager Don Hodges isn't feeling as patient. He has spent the past decade railing against excessive pay packages.
He protested quietly at first, avoiding stocks of companies with practices he considered to be abusive to shareholders. As his frustration built, he tried a new tactic, giving $50,000 to his alma mater, West Texas A&M University, to promote the teaching of corporate responsibility. The university used the gift to start courses this year in accounting ethics and corporate governance. The latter is required for finance majors.
Now Hodges wants to make sure corporate directors are equally educated about their duties to investors.
"In a publicly owned company, I think they should have some sort of certification. The CPA does. The lawyer does," said Hodges, co-manager of the Hodges Fund. "I think the answer is to toughen up boards and make them realize they have a responsibility to shareholders."
Executive pay barely registered on Hodges's radar screen during his first 40 years in the investment business. It wasn't until the last decade that he began seeing a pattern of jaw-dropping pay packages, which often seemed disconnected from stock performance.
In 1993, Congress allowed companies to keep taking a tax deduction for executive compensation over $1 million but required that the pay be tied to performance. That helped encourage the giant stock option grants that now make up the bulk of executive pay at many of the biggest public companies.
Meanwhile, corporate boards that were eager to stay competitive routinely offered pay packages that would keep their executives in the middle to upper pay ranges for their industries. That strategy eventually drove up the averages.
But this year, bonuses are likely to be sharply lower on Wall Street. Johnson Associates, a compensation consulting firm, predicts annual incentive pay for senior executives will fall at least 60 percent this year at investment banks, and by 55 percent or more at commercial banks.