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For better or worse, the shareholders are the ones who set the pay of the CEO. Much of that pay is in shares. The way to fight this is twofold: 1) Make it e

For better or worse, the shareholders are the ones who set the pay of the CEO. Much of that pay is in shares. The way to fight this is twofold: 1) Make it easier for people to start new companies and competitors. This serves both employees and customers. As a customer I get the best price when I have multiple people competing for my business. As an employee, I'm best treated and paid when there are multiple people bidding for my service. 2) Increase the penalty for legal violations, and make examples of people who violate the spirit of the law as well as the letter. Don't invite CEOs of companies who dodge taxes "To the letter but not spirit" of the law to the White House.

dctoedt 13y ago
> For better or worse, the shareholders are the ones who set the pay of the CEO. Um, no. At publicly-traded U.S. companies, executive compensation is set in the first instance by the compensation committee of the board of directors [1]. The law requires only that shareholders be allowed to vote on non-binding "say on pay" resolutions at least every three years (or more often if the shareholders so vote) [2]. It's been suggested that executive compensation naturally and inexorably ratchets upward because: + Comp committee members don't want to be sued by shareholders for negligence or gross negligence in setting executive comp. (That's just what happened when Disney was required to pay ex-CEO Michael Ovitz a $140 million severance package even though he'd been on the job only a year or so when he was shown the door [3].) + So, comp committees rely on survey reports about existing executive compensation levels in the relevant industry, market segment, etc. (They also hire professional consultants to provide documentation and political cover.) + Comp-committee members are supposed to be independent, that is, not beholden to management. BUT, board members tend to be supportive of management: They might well have been recruited by management. Business friendships develop among management- and non-management board members as well as with senior executives. The board as a whole feels it's a team; its members naturally want to be perceived as team players (they probably wouldn't be on the board in the first place if that weren't the case). + Here's where it gets interesting: Comp-committee members like it when they can tell company executives, your comp is in the top half for our industry. They might also honestly think that their company's executives deserve to be paid at least in the top half of the "comparables," that is, above either the average or the median for the company's industry segment. So consider what happens mathematically to executive compensation across the board when lots of comp committees have this mindset: The mid-range of the compensation band floats upward over time. + As the mid-range of the band rises over time, future compensation committees may feel pressure to raise executive compensation to keep up with the Joneses, that is, with the rising mid-range. [1] http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.18330.11.pdf http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.1833... [2] http://www.law.cornell.edu/uscode/text/15/78n-1; http://www.law.cornell.edu/uscode/text/15/78n-1; see also http://www.sec.gov/rules/final/2011/33-9178-secg.htm http://www.sec.gov/rules/final/2011/33-9178-secg.htm [3] http://www.integrogroup.com/data/File/white-papers/exec_comp_disney_decision_jan_06.pdf http://www.integrogroup.com/data/File/white-papers/exec_comp...
- mathattack 13y ago
  Thank you for adding so much detail to my oversimplification. Let's get back to the original question, though, which is about why shareholders have so much power. My contention is that shareholders (Via the board) have the most direct influence on senior executive compensation. Yes, it's indirect. Yes, there are biases that push it upwards. But this doesn't change that shareholders have much more influence. A bondholder doesn't get a direct say unless they have covenants that protect them. (At least until a default) Non-management companies don't get a direct say either. They can vote with their feet but that's about it. Communities rarely get a direct say. So what we're left with is companies deciding, "Do I act enlightened about caring for more than shareholder interests?" The way to encourage this from an employee's point of view is competition between firms for their services. Your (detailed and correct!) analysis doesn't change any of this.
  - dctoedt 13y ago
    > My contention is that shareholders (Via the board) have the most direct influence on senior executive compensation. Typically, institutional investors vote the bulk of the shares in a U.S. public company's election. The investment managers and governing bodies at such institutions often don't have strong feelings about things like limiting executive compensation. Sometimes, but not always, institutional investors follow the recommendations of proxy advisory services such as ISS and Glass, Lewis (http://en.wikipedia.org/wiki/Proxy_firm http://en.wikipedia.org/wiki/Proxy_firm). Those services have started to pay more attention to executive compensation in recent years. But as I understand the law, SEC regulations still relegate shareholder "say on pay" votes to non-binding advisory status.
    - danielweber 13y ago
      The investment managers and governing bodies at such institutions often don't have strong feelings about things like limiting executive compensation. Probably because it doesn't have much effect on their returns. I'd love to someone to try to prove me wrong, though. Start up a Vanguard-like fund that only invests in companies that pay their CEOs below average, or some similar metric. It just might turn out that there's a bunch of ten-dollar bills on the street we are all missing and the economy as a whole would be better off if they turn out to be right. Either way, it would be valuable data.
rayiner 13y ago
Except at startups, CEOs are paid out of revenues not investor capital. It's the employees that generate the company's revenue.

dctoedt 13y ago

> For better or worse, the shareholders are the ones who set the pay of the CEO. Um, no. At publicly-traded U.S. companies, executive compensation is set in the first instance by the compensation committee of the board of directors [1]. The law requires only that shareholders be allowed to vote on non-binding "say on pay" resolutions at least every three years (or more often if the shareholders so vote) [2]. It's been suggested that executive compensation naturally and inexorably ratchets upward because: + Comp committee members don't want to be sued by shareholders for negligence or gross negligence in setting executive comp. (That's just what happened when Disney was required to pay ex-CEO Michael Ovitz a $140 million severance package even though he'd been on the job only a year or so when he was shown the door [3].) + So, comp committees rely on survey reports about existing executive compensation levels in the relevant industry, market segment, etc. (They also hire professional consultants to provide documentation and political cover.) + Comp-committee members are supposed to be independent, that is, not beholden to management. BUT, board members tend to be supportive of management: They might well have been recruited by management. Business friendships develop among management- and non-management board members as well as with senior executives. The board as a whole feels it's a team; its members naturally want to be perceived as team players (they probably wouldn't be on the board in the first place if that weren't the case). + Here's where it gets interesting: Comp-committee members like it when they can tell company executives, your comp is in the top half for our industry. They might also honestly think that their company's executives deserve to be paid at least in the top half of the "comparables," that is, above either the average or the median for the company's industry segment. So consider what happens mathematically to executive compensation across the board when lots of comp committees have this mindset: The mid-range of the compensation band floats upward over time. + As the mid-range of the band rises over time, future compensation committees may feel pressure to raise executive compensation to keep up with the Joneses, that is, with the rising mid-range. [1] http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.18330.11.pdf http://www.wlrk.com/webdocs/wlrknew/wlrkmemos/wlrk/wlrk.1833... [2] http://www.law.cornell.edu/uscode/text/15/78n-1; http://www.law.cornell.edu/uscode/text/15/78n-1; see also http://www.sec.gov/rules/final/2011/33-9178-secg.htm http://www.sec.gov/rules/final/2011/33-9178-secg.htm [3] http://www.integrogroup.com/data/File/white-papers/exec_comp_disney_decision_jan_06.pdf http://www.integrogroup.com/data/File/white-papers/exec_comp...

mathattack 13y ago
Thank you for adding so much detail to my oversimplification. Let's get back to the original question, though, which is about why shareholders have so much power. My contention is that shareholders (Via the board) have the most direct influence on senior executive compensation. Yes, it's indirect. Yes, there are biases that push it upwards. But this doesn't change that shareholders have much more influence. A bondholder doesn't get a direct say unless they have covenants that protect them. (At least until a default) Non-management companies don't get a direct say either. They can vote with their feet but that's about it. Communities rarely get a direct say. So what we're left with is companies deciding, "Do I act enlightened about caring for more than shareholder interests?" The way to encourage this from an employee's point of view is competition between firms for their services. Your (detailed and correct!) analysis doesn't change any of this.
- dctoedt 13y ago
  > My contention is that shareholders (Via the board) have the most direct influence on senior executive compensation. Typically, institutional investors vote the bulk of the shares in a U.S. public company's election. The investment managers and governing bodies at such institutions often don't have strong feelings about things like limiting executive compensation. Sometimes, but not always, institutional investors follow the recommendations of proxy advisory services such as ISS and Glass, Lewis (http://en.wikipedia.org/wiki/Proxy_firm http://en.wikipedia.org/wiki/Proxy_firm). Those services have started to pay more attention to executive compensation in recent years. But as I understand the law, SEC regulations still relegate shareholder "say on pay" votes to non-binding advisory status.
  - danielweber 13y ago
    The investment managers and governing bodies at such institutions often don't have strong feelings about things like limiting executive compensation. Probably because it doesn't have much effect on their returns. I'd love to someone to try to prove me wrong, though. Start up a Vanguard-like fund that only invests in companies that pay their CEOs below average, or some similar metric. It just might turn out that there's a bunch of ten-dollar bills on the street we are all missing and the economy as a whole would be better off if they turn out to be right. Either way, it would be valuable data.

rayiner 13y ago

Except at startups, CEOs are paid out of revenues not investor capital. It's the employees that generate the company's revenue.