[quote]Inner Hulk wrote:
…
I won’t argue they’ve helped make advancements, but that in no way adds weight to your argument. Fact remains, they make too much money. You’re missing the point.[/quote]
The real question is, who are you to decide what constitutes “too much”? You have people like Bill Gates who build companies and create hundreds of billions of dollars of wealth for other people, including both investment return and jobs – yes, Microsoft employs many people, and companies founded on technology based on providing extras on the Microsoft technology provide even more.
The example of such people also inspires risk-taking in small entrepreneurs and venture-capital investors who invest dollars and sweat equity with the dream of building something like Microsoft or Google - and in the face of enormous odds of failure.
To the particular point of CEO pay, to the extent there are problems, many can be traced to a previous generation’s idiot populists who railed against the “greedy corporate raiders” who would come in and buy companies – and then might break them up and sell the parts or make changes to make them more competitive.
You know, essentially what big private equity funds still do. But to fight against such “greedy corporate raiders,” idiot populists convinced worthless politicians to pass laws allowing take-over defenses such as poison pills, shareholder rights plans, staggered BOD terms and other such defenses under state corporation law.
This hamstrung the ability of buyers to purchase a company if management didn’t want to sell – note I said management, not shareholders. Guess what was one of the most effective market checks on the power of management to do things like vote for compensation packages that the shareholders thought were out of line? Yes, that’s right: hostile takeovers.
There is an essential disconnect in the corporate form of organization known as the “agency problem.” The main issue is that you have a management team that controls the assets that are owned by shareholders.
This needs to be the case - but management can manage the assets in such a manner as to give themselves greater benefits at the shareholders’ expense. The shareholders’ representative is the board - the problem, particularly in the advent of staggered boards, is that many boards are “captured” by management.
The board members are friends of the CEO, and likely got on the board on the recommendation of the CEO. And the CEO often sits as chairman of the board. Many corporate governance folks advocate the idea of not allowing the CEO or CFO to sit on the board of large public companies to assuage this issue.
The other issue is that there is a market for CEOs of public companies, and a good CEO can boost stock price and create value for the shareholders. A CEO who adds value deserves to capture part of that value – and negotiates with the board to do so in his compensation package. The traditional way to do this is with stock options.
One real issue is that there is a measurement problem – public companies are part of a market, and overall market movements can obscure the actual value added by management. For instance, if a biotech company has its share price decline by 5%, that looks bad - but what if the market pounded the biotech sector such that the average biotech stock lost 15%.
All of a sudden that 5% loss looks good. Conversely, if a financial company had a 10% increase in share price that looks good - but what if the average financial stock went up 20%. Traditional stock options don’t capture that - but management only is incented to fix problems that tend to show they are underpaid, not when they’re overpaid. This is why some people have proposed granting stock options tied to an index of competitor companies.
With regard to golden parachute payments, these also have economic rationale in a lot of cases – particularly hires from outside an organization. An outside hire is giving up a good position at another company and entering into a risky situation. It’s also very likely that a lot of his compensation is tied up in stock options that vest over time – so if he’s fired or leaves because it’s a bad fit, he would be out a lot. Thus the advent of the golden parachute.
Someone pointed out above that the key is getting large institutional shareholders to be active in communicating with the board and management. TIAA-CREF, pension plans and large mutual funds need to actively represent shareholder interests with the board, and guard against agency issues.
They have big enough stakes in the company to care – someone who owns 100 shares of Exxon could care less if he received an extra cent per share because the CEO got median rather than market-leading compensation. The new SEC disclosure rules for the proxy are a good thing in that they highlight to value of perquisites.
But at the end of the day, it’s the shareholders’ issue. It’s their company.