"Director Watch: Putting an End to Blank Checks for CEOs"
Erskine Bowles
Martin Feldstein
"Friends don't try to save money by cutting their friends' pay. And when [corporate board] directors themselves are pocketing hundreds of thousands of dollars a year for attending 4-10 meetings, there is little incentive to take their jobs seriously."
-- Dean Baker, in "Corportate Cronyism: The Secret to Overpaid CEOs"
by Ken
In "Corportate Cronyism: The Secret to Overpaid CEOs," Dean Baker of the Center for Economic Policy Research (CEPR) tackles the subject of out-of-control executive pay, noting that "CEOs can get paychecks in the tens or hundreds of millions even when they did nothing especially notable."
They may just have been in the right place at the right time, like Lee Raymond, who "retired from Exxon-Mobil in 2005 with $321 million . . . at a time when a quadrupling of oil prices sent profits soaring." They may even have presided over their companies' tanking, like Home Depot's Bob Nardellior the financial-industry CEOs who "took their companies to the edge of bankruptcy or beyond and still walked away with hundreds of millions of dollars in their pockets."
"It's not hard," says Dean, "to write contracts that would ensure that CEO pay bears a closer relationship to the company's performance."
For example, if the value of Raymond's stock incentives at Exxon were tied to the performance of the stock of other oil companies (this can be done) then his going away package probably would not have been one-tenth as large. Also, there can be longer assessment periods so that it's not possible to get rich by bankrupting a company.Dean asks, why does it matter? And he suggests two reasons:
If anyone were putting a check on CEO pay, these sorts of practices would be standard, but they aren't for a simple reason. The corporate directors who are supposed to be holding down CEO pay for the benefit of the shareholders are generally buddies of the CEOs.
Corporate CEOs often have considerable input into who sits on their boards. (Some CEOs sit on the boards themselves.) They pick people who will be agreeable and not ask tough questions.
For example, corporate boards probably don't often ask whether they could get a comparably skilled CEO for lower pay, even though top executives of major companies in Europe, Japan, and South Korea earn around one-tenth as much as CEOs in the United States. Of course this is the directors' job. They are supposed to be trying to minimize what the company pays their top executives in the same way that companies try to cut costs by outsourcing production to Mexico, China, and elsewhere.
But friends don't try to save money by cutting their friends' pay. And when the directors themselves are pocketing hundreds of thousands of dollars a year for attending 4-10 meetings, there is little incentive to take their jobs seriously.
Instead we see accomplished people from politics, academia, and other sectors collecting their pay and looking the other way. For example, we have people like Erskine Bowles who had the distinction of sitting on the boards of both Morgan Stanley and General Motors in the years they were bailed out by the government. And we have Martin Feldstein, the country's most prominent conservative economist, who sat on the board of insurance giant AIG when it nearly tanked the world's financial system. Both Bowles and Feldstein were well-compensated for their "work."
• "[I]t takes away money that rightfully belongs to shareholders, which include pension funds and individuals with 401(k) retirement accounts."
* "[I]t sets a pattern for pay packages throughout the economy."
When mediocre CEOs of mid-size companies can earn millions or tens of millions a year, it puts upward pressure on the pay of top executives in other sectors."
It is common for top executives of universities and private charities to earn salaries in the millions of dollars because they can point to executives of comparably sized companies who earn several times as much. Those close in line to the boss also can expect comparably bloated salaries. In other words, this is an important part of the story of inequality in the economy.
ENTER "DIRECTOR WATCH" AND "PAY PALS"
CEPR has taken two steps to shine a light on corporate-board cronyism, Dean says.
• To try to impose the checks that don't currently exist . . . CEPR has created Director Watch. This site will highlight directors like Erskine Bowles and Martin Feldstein who stuff their pockets while not performing their jobs.
• And CEPR has worked with Huffington Post "to compile a data set that lists the directors for the Fortune 100 companies, along with their compensation, the CEOs' compensation, and the companies' stock performance. This data set is now available at the Huffington Post as Pay Pals.
"Perhaps," says Dean,
a little public attention will get these directors to actually work for their hefty paychecks. The end result could be to bring a lot of paychecks for those at the top back down to earth.
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