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‘Say on Pay’ Won’t Prevent Bonus Gluttony

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Posted on Feb 18, 2010
AP / Bebeto Matthews

Then-Merrill Lynch Chairman and CEO John Thain, left, and then-Bank of America Chairman and CEO Ken Lewis shake hands after a 2008 news conference announcing the sale of post-meltdown Merrill. Both men have been highly criticized for their performance as executives, and yet both have done quite well for themselves.

By Moshe Adler

Like many of us, President Barack Obama is outraged by how out of control executive compensation is. When it comes to bailed-out institutions, he has taken to using strong language, calling bankers “fat cats” and “reckless.” Of course, executive compensation is not a new problem, and many reforms have been instituted in the past to try to deal with it. Obama now says that his new reform, giving shareholders a “say on pay,” will work because it will give shareholders the incentive to “mind the store.” It won’t work.

Shareholders simply do not have the incentive, time or knowledge to mind the store, and say-on-pay won’t change this. Why would a well-diversified shareholder, a person who has spread her savings among a range of corporations (or, more likely, whose 401(k) has done this for her) and who therefore does not own more than a billionth of any single corporation, invest the time and money required in order to learn whether Smith at $150 million is a better CEO hire than Jones at only $125 million? Is she supposed to repeat the exercise for every corporation in her portfolio?

Of course, individuals usually do not own stocks in corporations directly, and this exacerbates the problem. The financial institutions that own corporate stocks are themselves corporations with their own executives, and this means there are two layers of executives getting a cut. It is also folly to expect bank or mutual fund executives to lead a revolt against excessive pay, and naturally they have not.

In 2007, Stan O’Neal received a “retirement package” of $161 million after the institution he led, Merrill Lynch, lost $12 billion in one year. In 2006, Merrill Lynch had voted against any proposal that would have limited severance pay or tied pay to performance in all the corporations that its different mutual funds held. A study of the 29 largest mutual funds in 2006 discovered that Merrill Lynch was not alone. More than three-quarters of the time, these funds voted for management-sponsored proposals regarding executive pay. There were exceptions, such as the fund of the teachers unions, TIAA-CREF, but these constituted a negligible minority.

Say-on-pay is a dog that won’t hunt. The best we can hope for is that it won’t make things worse. Boards of directors all too often fail to serve the interests of their corporations, but at least that is their legal duty. The only duty a shareholder has is to herself, however, and say-on-pay is an invitation for large stakeholders to launch partisan campaigns for executives who will do their bidding at the expense of the rest of the shareholders.

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The observation of Christina Romer, head of the White House Council of Economic Advisers, that shareholders do not have an incentive to mind the store is nothing new. Economists Adolf Berle and Gardiner Means pointed this out back in 1932. But unlike Romer, they concluded that nothing could be done about it when ownership was diffused. Seventy-eight years later this remains true.

Let’s remember that as recently as 2002, following the collapse of Enron and WorldCom, Congress passed the Sarbanes-Oxley Act in part because executives were abusing compensation that was being given in the form of options. Let’s also recall that including options in compensation was itself an invention that was supposed to curtail mismanagement, because the change was supposed to align more closely the interests of executives with the interests of shareholders. Bonuses are the new options, and now it is bonuses that must be fixed.

Because of diffused ownership, shareholders remain totally vulnerable to the abuse of excessive executive compensation. It is necessary for the government to get more involved, perhaps by setting a ratio between shareholders’ and executives’ incomes.

There are those who will argue that such laws violate the right of shareholders and executives to enter into contracts freely. But when parties possess vastly disproportionate powers, a contract between them that gives the strong party the lion’s share should not be legal.

In a corporation, executives have all the power and shareholders have none. With or without a say on pay, this situation cannot be changed. What can be changed is the ability of executives to exploit this imbalance, and only a law that limits executive pay will accomplish this.

Moshe Adler teaches economics at Columbia University and at the Harry Van Arsdale Center for Labor Studies at Empire State College. He is the author of the book “Economics for the Rest of Us: Debunking the Science That Makes Life Dismal,” just published by The New Press.


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By beeline, May 11, 2010 at 1:21 am Link to this comment

I’ll believe it when I see it. Executives will make life as difficult as they possibly can for anyone who tries to cap their earnings.

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By msgmi, February 22, 2010 at 3:48 pm Link to this comment
(Unregistered commenter)

Today, 0222/2010, a MSNBC Wall Streeter opined, “whatever caused this recession….” It’s like everything else except Wall Street hubris was the cause. Ironically, most of Wall Street blames Main Street for the financial meltdown. Delusional people in charge of the economy, we’re definitely screwed.

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By ocjim, February 21, 2010 at 3:17 pm Link to this comment

Laws are instituted by men and a few women based upon moral and legal tradition. In modern times legal definitions of institutions have altered the meaning of ownership of property and the prosecution of those who steal it. CEOs and executives might have shares in corporations but do not own them, so why are they not prosecutable for stealing what belongs to the stockholders? If you say the stockholder proxy these decisions to a board, we can say that the executives commit fraud or criminal conspiracy to get their obscene pay and bonuses.

At the very least it is embezzling. Many an average American are swept off to prison for grand larceny. What we have in business proves that money and power buys freedom either legally or in practice.

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PatrickHenry's avatar

By PatrickHenry, February 21, 2010 at 10:56 am Link to this comment

Privately held companies can pay their execs anything they want, publicly held companies should be regulated in areas of pay, allowances and types of investments which can be persued.

Too many pension and 401K funds are traded across the board where the investors (public) have little or no idea of how their money is being used.

These huge bonuses should be returned to the shareholders in the form of dividends.

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kulu's avatar

By kulu, February 21, 2010 at 1:28 am Link to this comment

Listening to Obama these days gives me a sick feeling in the stomach and a pain in the backside. Initially when he spoke I was inclined to give him the benefit of the doubt and do my best to accept him at his word. Now I know differently and treat him just like all mainstream politicians, i.e. as a liar.

If he does by some sheer chance let a morsel of truth slip out one day I will forgive myself if I cannot accept it as such.

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By David Merit, February 20, 2010 at 10:55 pm Link to this comment
(Unregistered commenter)

He SAYS he is outraged.

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By rollzone, February 20, 2010 at 1:21 pm Link to this comment

hello. shareholders have the option to sell. paying a bonus for good job performance is good. using tax dollars to reward someone for bad performance is wrong. ...perhaps the government should set a ratio between shareholders and executives: get the government more involved??? which branch of government do you write for? what batch of cool AID did you swallow? alike you rightly pointed out, shareholders have next to nothing to do with the workings of business, they only place a bet upon their mutual success. government intrusion will be subversive to capitalist incentive and performance.

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By Hammond Eggs, February 20, 2010 at 10:36 am Link to this comment

Like many of us, President Barack Obama is outraged by how out of control executive compensation is.

This is simply not so.  These thieving “fat cats” are Obama’s best friends.  He loves them.  He’ll crawl on his belly for them.

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Samson's avatar

By Samson, February 19, 2010 at 4:28 pm Link to this comment

Before around 1980, we knew the answer

Tax ridiculously high bonuses and salaries with ridiculously high tax rates.  That sets an effective cap on salaries. 

It was Ronald Reagan who changed that.

And its every Democrat since who’s accepted that change and done nothing to reverse it.

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By ocjim, February 19, 2010 at 1:19 pm Link to this comment

“Say on Pay” won’t work and hasn’t worked.

What we should do is elect an independent commission on the proper pay for executives and make it a felony to abscond with more in any form. Executives taking excessive pay are truly criminals who should be prosecuted lie an embezzler, a bank robber, or anyone who takes another’s property.

Executives are not owners of business. They are appointed to manage at reasonable pay. If you take more than reasonable pay, you are an embezzler and should be tried.

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By GW=MCHammered, February 19, 2010 at 12:13 pm Link to this comment
(Unregistered commenter)

Wall Street’s Bailout Hustle
Goldman Sachs and other big banks aren’t just pocketing
the trillions we gave them to rescue the economy -
they’re re-creating the conditions for another crash

MATT TAIBBI
Posted Feb 17, 2010 5:57 AM

http://www.rollingstone.com/politics/story/32255149/wall_stree
ts_bailout_hustle

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By Samson, February 18, 2010 at 3:58 pm Link to this comment

Of course it won’t stop any of this. Its designed not to stop any of these.

These corporate execs paid millions of dollars into Obama’s last campaign, and certainly into this year’s Dem campaigns precisely to make sure that nothing happens that reigns in this flow of money to them.

Oh, Obama and the Democrats will make a fake showy effort at something.  But, look at the millions of corporate dollars in their accounts, and you can then bet your last unemployment check that whatever Obama and the Democrats do it will have such loopholes and outs in it that it really won’t do anything.

That’s what you get when you vote Democrat. Please stop.

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By bozh, February 18, 2010 at 11:19 am Link to this comment
(Unregistered commenter)

“Gluttony” the cause of bonuses? Aren’t bonuses and high pay really a mere symptom; causes being s’mthing entirely different.

Getting bonuses and too much pay is legal. This means that the law makers is one cause for getting more money than one deserves.

It is also a constitutional OK; thus,the constitution [a set of ‘laws’ written by bonus getters] is still another cause for the iniquity.

Miseducation obviously is another cause; this time for the gluttony. And arenn’t lies as powerful as the truth; so why not use them?
And of course, causes for slavery, exploytation, extirpation of indigenes, wars, denial of health care, free higher education, right to life, etc.

Is it a suprise that when all ‘educators’, pols, priests, collumnists solely dwell on symptoms an the cult of a person, that amers are so deluded?

Isn’t the viagra really invented so that amers wld become even more deluded?
Ah, the Greatness of America! tnx

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By KISS, February 18, 2010 at 10:27 am Link to this comment

You think Obama, king of thieves is worried? Like Clinton, he is destine to be a young multi-millionaire after he leaves office.
How naive to think differently. In the meantime, observe the sleight of hand and mouthing of feel-good lies.

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By hark, February 18, 2010 at 9:21 am Link to this comment
(Unregistered commenter)

The apparent premise of this article, “Like many of us, President Barack Obama is outraged by how out of control executive compensation is,” is simply wrong.  Obama has said on many occasions that getting rich is the American way, and a good thing.  He has no problem with huge bonuses, salaries, stock options, pensions, deferred compensation and perks for “savvy businessmen,” for rewarding “success” with gigantic compensation packages.  He draws the line only for those making huge sums while running their companies into the ground.

Obama is the quintessential, winner take all American, as are most of us, and that is our problem.
We don’t pay people at the bottom who do real work a living wage, and we reward those at the top with ten to a hundred times more than they contribute to society.

Unfortunately, most of us like it this way, so it’s not going to change.

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By ardee, February 18, 2010 at 5:40 am Link to this comment

I think this a reflection of a sickness in our culture rather than a problem requiring legislative action. The gulf between the haves and the have nots, or even have somes, widens to the point where these executives believe themselves above law or reason or conscience. Further i think any such legislation restricting compensation would stick in the craw of the average American , those among us who still believe in the ‘American Dream’.

Better we focus our attention to problems that can be resolved by congressional action; taking the money out of political campaigns for example.

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By RdV, February 18, 2010 at 5:24 am Link to this comment

Right out of the box:

“Like many of us, President Barack Obama is outraged by how out of control executive compensation is.”

  Ah, yes the “savvy businessman” who all Americans apparently consider deserving of their multi-million dollar bonuses and tax cuts to stimulate the economy by creating jobs (while they offshore and lay-off to inflate the bottom line)while we are lectured about deficits and wasteful “entitlements” like Social Security and medicare—without there ever being any mention of illegal wars for what we don’t know. You mean the crooks Obama defends, comparing them to celebrity sports stars—except they bilked millions, swindled countries, drained the treasury, bought the Government and the media..

  Don’t think it escapes us when these lines to frame consensus—like Obama is outraged (despite the evidence to the contrary and the rather smug & unconvincing declarations)—are planted. You don’t have to tell us that his PR reform proposals are BS.

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