Follow-up on necessity of corporate regulation
Here is an excerpt from an article "explaining" why executive pay was more than 431 to 1 in 2004, up 10 times the ratio of 42-1, 25 years earlier.
Challenges of Aligning Pay and Executive Performance
Harvard Business School
Harvard article
"Q: So there's no automatic alignment between societal value creation and executive holdings of company equity?
A: Correct. There is no perfect alignment between societal value creation and stock or option incentives. Turning managers into owners is an important first step. Owners really do think about their assets differently, and work hard to find new and creative ways to maintain the value of those assets and to raise their value over time. So despite the current scandals, we need to be careful not to turn our backs on a system that has lots of virtues. Having said that, when managers have significant equity stakes, they not only have incentives to raise share value in ways that benefit society; they also have incentives to raise shareholder value in ways that don't benefit society. For example, they are more tempted to take advantage of monopoly power. They may be more tempted to pollute the environment. And they may even be tempted, as already discussed, to fool their own shareholders if the equity component of pay is not designed in the appropriate way.
So equity-based pay is a great place to start. But giving executives ownership stakes doesn't mean that you are finished. Regulators have a role. Tax authorities have a role. Boards have a role. And executives themselves have a role. In fact, all these constituencies have a role to play in providing the appropriate checks and balances, to make sure that the fuel in the rocket motivates value-creating behavior, and not value-destroying behavior."
Examples of regulatory efforts in this direction are found at:
Corporate Policy
"Executive Excess 2005, the latest report on CEO pay by the Institute for Policy Studies and United for a Fair Economy reveals that the ratio of CEO:Worker pay among the S&P 500 was still an average 431-to-1 in 2004 (not including certain forms of stealth compensation) - ten times higher than the 42-to-1 ratio that it stood at 25 years ago.
A precedent-setting limit on CEO pay was inserted into Section 331 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 — a bill pushed through Congress by credit card companies. The otherwise wretched piece of legislation explicitly limits executive pay, for the first time ever in federal law, to a fixed multiple of the pay that goes to average workers. Under the new provision, no company in bankruptcy can award its executives any retention bonus or severance pay that runs over ten times the average bonus or severance awarded to regular employees in the previous year."
Regulatory solutions can be done!
For other regulatory solutions, see site above.
Greed and Good by Sam Pizzigati is THE book on CEO compensation and corporate reform. (Available at the Beulah Public Library) An absorbing, compelling read.
Challenges of Aligning Pay and Executive Performance
Harvard Business School
Harvard article
"Q: So there's no automatic alignment between societal value creation and executive holdings of company equity?
A: Correct. There is no perfect alignment between societal value creation and stock or option incentives. Turning managers into owners is an important first step. Owners really do think about their assets differently, and work hard to find new and creative ways to maintain the value of those assets and to raise their value over time. So despite the current scandals, we need to be careful not to turn our backs on a system that has lots of virtues. Having said that, when managers have significant equity stakes, they not only have incentives to raise share value in ways that benefit society; they also have incentives to raise shareholder value in ways that don't benefit society. For example, they are more tempted to take advantage of monopoly power. They may be more tempted to pollute the environment. And they may even be tempted, as already discussed, to fool their own shareholders if the equity component of pay is not designed in the appropriate way.
So equity-based pay is a great place to start. But giving executives ownership stakes doesn't mean that you are finished. Regulators have a role. Tax authorities have a role. Boards have a role. And executives themselves have a role. In fact, all these constituencies have a role to play in providing the appropriate checks and balances, to make sure that the fuel in the rocket motivates value-creating behavior, and not value-destroying behavior."
Examples of regulatory efforts in this direction are found at:
Corporate Policy
"Executive Excess 2005, the latest report on CEO pay by the Institute for Policy Studies and United for a Fair Economy reveals that the ratio of CEO:Worker pay among the S&P 500 was still an average 431-to-1 in 2004 (not including certain forms of stealth compensation) - ten times higher than the 42-to-1 ratio that it stood at 25 years ago.
A precedent-setting limit on CEO pay was inserted into Section 331 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 — a bill pushed through Congress by credit card companies. The otherwise wretched piece of legislation explicitly limits executive pay, for the first time ever in federal law, to a fixed multiple of the pay that goes to average workers. Under the new provision, no company in bankruptcy can award its executives any retention bonus or severance pay that runs over ten times the average bonus or severance awarded to regular employees in the previous year."
Regulatory solutions can be done!
For other regulatory solutions, see site above.
Greed and Good by Sam Pizzigati is THE book on CEO compensation and corporate reform. (Available at the Beulah Public Library) An absorbing, compelling read.
posted by Anne Damm at 10:09 PM
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