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Executive Pay
Above, Kevin J. Murphy, profesor and co-author of a 1990 article in the Harvard Business Review on executive pay.
(Pat Crowe II - Bloomberg News)
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Second, through its bailout programs, the government can set conditions for companies that accept federal funds. For example, the government is requiring participating firms to eliminate incentives for executives to take "unnecessary and excessive risks that threaten the value of the financial institution." It's unclear how companies will apply such a nebulous standard. In the spirit of both the AFSCME proposal and the Treasury mandate, the investment firm Morgan Stanley recently said it will make a portion of annual bonuses subject to recapture by the company.
Third, either Congress or the Securities and Exchange Commission could make it easier for big shareholders to put their own candidates for board seats on the corporate ballot. In theory, that could make directors much more accountable. For it to work, shareholders, especially institutions like pension and mutual funds, would have to take a more active role than many have had the stomach to play in the past.
The plan could backfire. If executives are forced to confront shareholders with real power, would they be any less motivated to deliver short-term results, or the illusion of short-term results -- even if those compromise the company's interests over the long run?
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Outrage about executive pay is far from a new phenomenon.
Back in 1990, two professors warned that something very bad was taking place in America's boardrooms: Executives were being paid too little.
"On average, corporate America pays its most important leaders like bureaucrats. Is it any wonder then that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets?" professors Michael C. Jensen and Kevin J. Murphy wrote in the Harvard Business Review.
Executives, not surprisingly, embraced the idea. In a way, so did their toughest critics. At the time, some shareholders were up in arms about million-dollar executive salaries. They demanded that pay be based on performance, and they bought into the notion that chief executives should be able to make more money as long as they earned it.
President Bill Clinton and Congress got into the act in 1993, dictating that companies could no longer take tax deductions for executive pay packages of more than $1 million -- unless the pay was performance-based.
What followed was a massive proliferation of stock options, making it possible for executives and workers alike to attain fortunes that were previously unimaginable. Options give the holder the right to buy shares of stock at a fixed price -- ordinarily, the price at which the shares are trading when the options are granted. If the market price of the stock climbs, the holder can exercise the options and sell the shares at a profit.
If the executive is awarded options to buy 500,000 shares at $10 each and the stock price climbs to $100 -- well, you do the math.
Corporate boards claimed that they were aligning the interests of executives with those of shareholders. They were wrong.
