Is the executive pay bubble popping?

By J Saft
January 28, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

Signs are it won’t just be the salaries of bankers coming under fire.

An unusual array of forces are combining to make it very likely that top tier pay may be structurally falling, rather than simply taking a cyclical dip during a downturn.

Take it for granted that pay in the financial sector will fall. A combination of increased government ownership and a shrinking businesses taking fewer risks with other people’s money will see to that.

But even if you cast arguments about a new mood of sobriety aside as humbug, government intervention and shareholder activism may combine to force down the share that top executives get of profits in businesses across the economy, even among companies not getting government handouts.

U.S. Treasury Secretary-designate Tim Geithner told Congress last week he would consider extending a $500,000 cap on the tax deductibility of executive pay to companies beyond those taking government bailout money.

“If confirmed, I would consider extending at least some of the TARP provisions and features of the $500,000 cap to U.S. companies generally as well as potentially imposing other rules beyond those potentially in effect,” he wrote in reply to questions from Senator Carl Levin.

Measures to limit pay will have a trailing wind so long as the economy sinks and will be heard in the boardroom, even if they’re not particularly effective or not enacted at all.

Shareholders too are becoming more militant, and not just at institutions that have obviously underperformed or taken huge risks.

More than 100 “say-on-pay” shareholder resolutions, which give shareholders a vote on compensation, have been proposed at U.S. corporations this annual meeting season. Computer maker Hewlett-Packard adopted such a measure this month, although it won’t come into effect until 2011. Swiss companies UBS, Credit Suisse and Nestle have all agreed to introduce such an annual vote after pressure from a governance advocacy group backed by Swiss pension funds.

But why is this happening now, and will movements to limit compensation be just one more cause that is forgotten when good times return?

There has been something approaching correlation between the growth of debt in the U.S. economy and growth in pay for top executives. Both began to take off in the 1980s but the real acceleration came during the past 15 years.

It is impossible to say how linked the two were, but you can argue that the growing levels of debt artificially inflated economic growth, company profits and stock market returns.

Those great returns were a sedative for shareholders, encouraging them to stay quiet: let the big boys get on with making money and bank the dividends.

In other words, we were all getting rich, so why rock the boat because pay at the top was taking a bigger share? That is all over, and profits and return on capital will be under pressure from all sides for an extended period. It may well be that shareholders fail in attempts to wrest more of the profits from company insiders. But they will certainly have more of an incentive to try, as well as probably having more tools courtesy of regulation with which to beat company boards and executives about the head and shoulders.

In gross terms, CEO compensation fell in 2007 by 15.8 percent, according to a survey by consultants Mercer, though that was primarily driven by the falling value of stock-based compensation. Expect that trend to continue when the 2008 data is released.

For American companies with a market capitalization of more than $50 million the top five executives alone took home an average of almost 10 percent of aggregate earnings in 2001-2003, double the level of a decade before, according to research by Lucian Bebchuk of Harvard Law School and Yaniv Grinstein of Cornell University. Given that many of these companies will have had not tens, not hundreds but thousands of employees, the fact that the top five got 10 percent of earnings is astounding. They further found that even taking into account performance and growth at companies, CEO compensation nearly doubled between 1993 and 2003.

Bebchuk has argued that some of this is because relations between executives and the boards that approve their compensation aren’t truly arms-length. There are social factors and execs can reward or punish boards, though the fear of provoking “outrage” is one of the limiting factors. We certainly have reached a point where outrage is widespread.

But like ever rising house prices and debt levels, maybe the best way to view ballooning executive compensation is as a social rather than economic phenomenon. It started in the U.S. and spread, and the further it spread the easier it was to justify and the more normal it seemed — until something happened.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click here. –

22 comments

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Crooks: where would the worlds boardrooms be without em?

Posted by Billy | Report as abusive

All I have to say is “it’s about damn time!”

Posted by Tony | Report as abusive

Your last paragraph says it all. It is (was) a social problem. It’s my hope that going forward legislation will be inacted severely limiting executive comp. or at least taxing it heavily.
There are many who say that these approaches will cause these people to leave the US. I disagree. We provide them with the rule of law here and that’s more important than the money anyday. They know it. That’s why they spend so much on lobbying.

Posted by Barton | Report as abusive

Just playing devil’s advocate, here, but has there also been an increase in the “risk” that CEOs face? Today, moreso than 10 – 15 years ago, it seems as though CEO necks are a little further out on the chopping block relative to others within any given company. Also, are the axes larger, sharper and quicker to fall?

If it is “riskier” to be at the top, might not the expected rewards also need to be greater?

Just a thought….

The “good ol boy” network will always exist. Until legislation is put in place that prevents CEO’s from sitting on each others boards, especially compensation committee’s, the problem of “excessive compensation” will never end. The monopoly of CEO’s colluding together to determine compensation has to stop.

Thank you. This needed to be said and needs to be said many more times in many other forums.

Posted by B. Walter | Report as abusive

I have long considered corporate executives to be a criminal class. Prostitutes, pimps, drug dealers, bookies, loan sharks and corporate executives. That any single indivdual should make 500 times the pay of an average employee at a large company is obscene. The only corporate executive that even comes close to earning that kind of cash in terms of his proven track record is Steve Jobs . . .

Posted by Robert | Report as abusive

To Andrew,

Riskier? I couldn’t disagree more? Does the term “golden parachute” ring a bell? If these CEO’s “ever” get ousted, the compensation that they received during their tenure will set them up for life, along with their children and grandchildren. I stressed the word “ever” because how many CEO’s of banks, big banks, still have their jobs given the financial crisis?…virtually ALL of them. No, there is NO risk, just reward whether they fail in their role as executive or not.

This problem will not be solved until there are Govt. regulation imposed on CEO pay and compensation package. They are rewarded regardless of they fail the company/ ousted from the company/ or take the company in a better level. For them its a must win-win situation. I mostly blame the politicians who goes in bed with this class as they need their donation and lobbying money for political gain. So Govt. and politicians are reluctant to save public interest to gain their party or personal interest. Seems like we have a bigger hole in the so called Democratic process. Ideally an average salary of a CEO should not go over 10-50 times of a average salary worker. But 500 times – that’s outrageous.

Posted by roy | Report as abusive

You would have to enact federal law restricting execs from sitting on the boards of other companies. We would also need greater transparency of the actions of board members and execs. May even have to enact a law that required all execs to be directly elected by the shareholders with execs (internal or external) not being able to vote.

Probably never happen but that’s what it would take.

Posted by mike | Report as abusive

Corporate legends & myths have long run rampant in our country because EVERYONE loves to believe they are true.

Corporate myths such as “value added” executive compensation packages begin with Executive Recruiters – “corporate welfare kings/queens” who’s worth is highly questionable. As consultants, they get paid a percentage basis, not a flat fee, so of course they will do whatever necessary to get max compensation!

The consumer, taxpayer & shareholder pays for much more than executives’ excessive salaries. There is not one private golf course in this country that is NOT paid for by tax deductions.

US fiscal-tax policies encourage excess at the top, be it salaries, bonuses, stock options, or the ever-growing baskets of deductible perks – country club memberships, golf outings, sports skyboxes, tickets, etc. Entertainment & marketing expenses in the form of sports & other types of “entertainment expenses” (we all know what that is) are deducted without batting an eyelash – taking tax revenue from taxpayers who make up for it.

In the same vein, these excessive “expenses” are paid by consumers in the form of inflated cost of goods & services. Shareholders also pay in dividends they would have otherwise received.

Another great corporate myth is members of the Board enhance shareholder value & serve at the pleasure of the shareholders. When have even institutional shareholders participated in nominating committees? How hard has it been to get a compensation-limiting proposal on the ballot? How hard has it been to sue & recover on the basis of failure to pay dividends?

If Congress would eliminate such tax loopholes, sufficient tax revenue would be available to pay down half the national debt. Eliminating excessive expenses would also drop prices to consumers. The other half would come from taxing dividends that could actually be paid to shareholders.

Believe me, the executives will pay out of their own pockets the expenses of country club, golf & yacht club memberships… because that is their social life.

Well said Andrew. Until we can stop them from taking such large risks with our money, not theirs, and being rewarded for it, this will continue to happen over and over again until the end of time. You all are absolutely right in saying they are still allowed to stay in their present position, after having the government bail them out and still act as if they are untouchable. They ran the company into the ground and still feel they are entitled to stay as CEO? It doesn’t make sense. And yes, you are also right about them being set for life, no matter what happens to the company. Their immediate family too. What should be in place is some sort of bonus structure, that allows moderate distribution of stock options over a period of time(years?), not executable for a certain length of time specifically connected to the performance of the companies profits. I think it is time for regulation over the industry and some changes to be made, allowing more transparency for shareholders. As long as CEO’s and former CEO’s sit on the same board that determines their compensation and/or management issues, it stops the board from doing what it is supposed to do, which is work for the shareholders not the CEO. The CEO should report to the board, not to a board full of former colleagues and CEO’s that are biased toward the current CEO.

Posted by Damian Palmares | Report as abusive

Not Andrew, I meant well said Trevor to Andrew. My apologies.

Posted by Damian Palmares | Report as abusive

The first thing I learned about business and it is my golden rule of business is “when money is on the table morality goes out the window”.

Posted by RFL | Report as abusive

Unfortunately RFL, you are absolutely right.

Posted by Damian Palmares | Report as abusive

This is what I would do:

$800b – buy up all of the “toxic debt” and hold it until it could be sold. Remove the senior management and boards of directors of any company that accepts fed. dollars. Every federal bailout check that is delivered would be presented by a Defense Contract Audit Agency Auditor who then takes up residence in that company and is supervised by a Federal Receiver…

Those folks who bought houses they couldn’t afford would be allowed to stay in their houses until the USG could sell the house.

Arrest, prosecute, jail and confiscate ALL of the propery, assets, financial and otherwise, trasferred and otherwise of all of the perpetrators of this fraud, corruption, theft and incompetence of this mass thievery. Perps such as Angelo Mozillo, Richard Fuld, John Thain, Barney Frank, Alan Greenspan and many, many more of these swindlers and thieves. The sh*t sheet is pages long. Their confiscated property would in turn be used to retire that portion of this federal “bailout”. End H1B visas. End “Free Trade” and replace it with “Fair Trade”. End business deregulation. We’ve had three major business scandals during the 25 years plus of deregulation. Enough is enough, deregulation doesn’t work, destructive greed dominates. Enforce anti-trust. Pfizer wouldn’t engulf and devour Wyeth for example. This massive swindle is the disease of fraud, corruption and theft and I’m the cure.

Posted by RFL | Report as abusive

I rewrote my plan for resolution of our massive economic problems when I am more coherent and not exhaused from a 10 hour work day. My bottom line: arrest and jail everyone involved. These perps have destroyed our economy by their greed and direct action and desrve no mercy from us their victims.

This is what I would do to “cure” our economic ills:

$800b – USG to buy up all of the toxic consumer and business debt and hold it until it could be sold off, terms restructured or otherwise permanently disposed of.

Remove the senior management and boards of directors of any company that accepts federal bailout money. Investigate and jail those executives and board members guilty of collusion, dereliction, incompetence and outright fraud and criminality. No exceptions.

Every federal bailout check that is delivered to any business would be presented by a Defense Contract Audit Agency Auditor who then takes up permanent residence in that company and is supervised by a Federal Receiver… The DCAA is tough and thorough. If these companies can’t “take care of business” the DCAA can do it for them.

Those folks who bought houses they couldn’t afford and were ripped off by predatory lenders and mortgage brokers would be allowed to stay in their houses until the USG could sell the house.

Arrest, prosecute, jail and confiscate ALL of the property, assets; financial and otherwise, transferred and otherwise of all of the perpetrators of this mass thievery, fraud, corruption and incompetence. Perps such as Angelo Mozillo, Chris Dodd, Richard Fuld, John Thain, Barney Frank, Alan Greenspan and many, many more of these swindlers and thieves down to the lowliest mortgage broker. Their confiscated property would in turn be used to retire that portion of the federal “bailout”.

End business deregulation. We’ve had three major business scandals during the 25 years plus of deregulation. Enough is enough, deregulation doesn’t work, Corporate America has proven time and again that it is not to be trusted and the thieves and BS artists always rise to the top.

The USG must enforce, anew, the anti-trust laws. The orgy of businesses engulfing and devouring other businesses must be stopped (Pfizer and Wyeth for example) to preserve the give and take of competition.

Trust will NOT return on the part of the people until ALL of the perpetrators of this massive swindle are jailed for the rest of their lives, their families are turned out into the street and their ill-gotten gains confiscated and used to repair the damage they caused. This economic disaster is not the result of the serendipity of business but the result of corporate crime on a massive scale.

These people are common thieves and profiteers. And profiteers used to be hanged…

Posted by RFL | Report as abusive

I like the DCAA idea RFL, we need tough regulators like that in the financial industry, it’s already been proven that self-regulation essentially equals no regulation.

Posted by Damian Palmares | Report as abusive

Just curious, what evidence is there between public debt and CEO pay, other than they both went up since the 1980s? The number of PCs also went up dramatically in that time. So did the number of cell phones, the number of miles flown on airlines, the amount of hispanic babies born in the U.S….

Debt grew dramatically from 2001 to 2003, when average CEO pay actually dropped. Debt ballooned last year when CEO pay will have taken a dramatic dive. Is there any evidence that debt is a driver of pay? Or is this just speculation upon which to base a populist opinion?

Posted by h-dawg | Report as abusive

RCL – great start. but lets add lobbyists and politicians to your list of greedy miscreants. lobbyists should be jailed with assets seized and sold to help cover the dept and CROOKED politicians should be EXECUTED on public tv for taking advantage of the people that elected them. With a list given to the public of exactly who was backing the crooked politicians, so that the public can then boycott their companies.

Politicians should vote on laws or the removal of laws based on what the voters in their districts are asking for, they should not be voting for or against something based on which company (Typically not even in their district) PAYS for.

Best sense – do away with lobbyists and oust ALL crooked politicians (Like Blago)

Posted by menotyou | Report as abusive

I often hear that obscene compensation is necessary to attract “talent”. These malefactors of great wealth and their defenders should pay for the fact that they don’t have to hire private armies to protect themselves and their money. I’m sure returning to 19560′s levels of taxation on the top income brackets would still be cheaper for them than hiring security forces to keep their money. Absolutely there should be a maximum wage. Anytime I read or hear someone imply there is something wrong with economic populism it reinforces the validity of a populist approach to economic inequality.

Posted by Tom Cuddy | Report as abusive

You could also correlate the middle and working classes degradation in relation to the increase in executive pay. It has only gotten worse since the 80s and it is really high time we deal with it. European CEOs do not act this obscenely.

Posted by Randy | Report as abusive

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