Posted by Adam @ 6:06 pm on April 30th 2007

CEO remuneration

Even easier than populist calls to soak the rich are calls to control the pay of board-level executives, particularly CEOs. There aren’t very many of them, after all, some of them get paid an enormous amount of money and no one really likes their boss, let alone their boss’s boss’s boss’s boss. So, there’s an article in the CSM today describing the current pressure for governmental intervention in CEO pay.

First of all, this is restricted to publically traded corporations; they are regulated by government already in various ways. But why on earth should government interfere with how much people actually get paid? There is a big concern about the ‘income gap’ (try googling on it and see how many stories appear), these concerns are often illustrated by looking at the compensation packages of top CEOs, and concerns are almost invariably accompanied by calls for government action. The government should act, right?

Well, I don’t think so, certainly not by imposing caps on how big salaries can be (which someone suggested during coffeetime discussion earlier this week). Even if such plans weren’t end-run by inventive accounting, it would just be another government attempt to push water uphill by opposing market forces. It’s not likely to achieve much, except perhaps driving corporate governance abroad.

Publically traded corporations are owned by the shareholders of that corporation; they may not be that happy about the pay received at the top of the corporation, particularly when such pay appears to be excessive relative to the performance of the corporation. Shareholders, however, may not be able to do that much about it by virtue of how the corporation is structured; that is something that government could get into, given that they do, to some extent, regulate publically traded corporations (although mostly, I guess, in terms of accounting and reporting). The CSM article alludes to shareholder empowerment legislation introduced in the UK, where this issue has also been discussed for some time and the new rules appear to be having the desired effect (so far, at least).

I don’t think that there’s an obligation to ensure that the benefits of economic growth are distributed ‘equitably’; that people who aren’t in the highest-powered jobs are barely beating inflation is not a great tragedy and that others have fallen behind is almost inevitable, given the fact that free markets are competitive and fluid. If, though, Professors Lucian Beb­chuk and Yaniv Grinstein, quoted in the CSM article, are right, then the issue is damaging the market itself (individual corporations don’t have any responsibility to the market as a whole, after all, just to themselves).

The market ideal would be, sure, you buy shares in the corporations that give you a bigger say in executive remuneration. If that doesn’t come to pass (because, say, insufficient people of CEO calibre are prepared to work for corporations like that, which is entirely possible) then should the US government follow the UK lead and forcibly empower shareholders?

I’m not sure what the answer is, except that a cautious and gradual approach is the best one if any action is to be taken at all (and I’m not convinced that this is such a huge problem). If shareholders start restricting the pay of successful CEOs disprortionate to the additional profits, that’s not likely to be a good thing; at most, they might wish to restrict the paydays for some unsuccessful CEOs, including those that are terminated for screwing things up, but judging what is proportionate isn’t going to be trivial. For the moment, I favour not legislating. That the rich are so much richer than the non-rich, and that the multiple is increasing, is neither good, nor bad; rather, it just is.

3 Comments »

  1. Man, I didn’t make a single humourous observation. I suck.

    Comment by Adam — 4/30/2007 @ 6:15 pm

  2. I’m very much with you on this one; shareholder rights legislation seems to be the best way of empowering consumers to restore sanity to the marketplace, though of course some forms of the legislation are more acceptable than others.

    Comment by Rojas — 5/1/2007 @ 10:15 am

  3. It’s a fault of groupthink among corporate boards more than it’s in any way a fault of too little governance. I DON’T think the push for CEO remuneration has been good for corporate America, but there are pretty clear mechanisms in place for remedying it quickly should they get the desire and wisdom to do so.

    Comment by Brad — 5/1/2007 @ 10:24 am

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