Curbing Excessive Pay, Board Clout of Executives Would Help Business


First Published in the Atlanta Journal-Constitution 2-4-2009

by Rob Hassett

Now that we taxpayers are bailing out banks and other companies that were grossly mismanaged, we should put corporations on a sounder footing and curb excessive compensation for executives of public companies.

First, no executive of a public company should be allowed to sit on the board of directors of that company. The CEO of a public company is often on the board and sometimes the chairman. Being on the board gives the CEO undue influence on the other board members regarding his or her compensation.

Second, each public company should be required to display the last three years of revenue, earnings, stock prices and executive pay in a prominent and clear format on the investor-relations page of the company’s website. Investors can obtain this information from the Security and Exchange Commission’s Website, but putting it on the investor-relations page would make it more accessible to the average investor.

Third, if despite all of the above the directors of a company still decide to provide executive compensation that is above an amount that would be set liberally by the SEC based on the size of the company and other factors, the company should be required to obtain shareholder approval.

Unfortunately, many executives have shown they are not capable of reining in excessive pay and bonuses on their own.

Merrill Lynch, a company that lost $27 billion last year, paid out billions of dollars in bonuses to many of its executives just before Bank of America’s taxpayer-backed takeover. In 2006, the highest paid executive of any public company was Stanley O’Neal, the chief executive officer of Merrill Lynch at the time, who received total compensation of $91 million.

In 2006, the CEO of Countrywide Financial Corporation, Anthony Mozilo, received total compensation of $48 million. Countrywide was teetering on the edge of bankruptcy when it was recently sold to Bank of America in a fire sale brought on by poor management.

Mel Karmazin, the founder and chief executive officer of Sirius Satellite Radio, received compensation of $32 million in 2007 even though Sirius never made a profit before merging with XM Satellite Radio in 2008.

These are not isolated instances. The problem is not just that a few rogue executives are extraordinarily greedy and have indifferent or intimidated boards. The problem is that too many executives of public companies have insatiable appetites for money and choose to use their considerable skills to increase their compensation instead of doing what’s best for their shareholders.

Some will argue that part of the compensation referred to above was in the form of incentive compensation. In other words the executives were paid a large portion of their compensation for “outstanding” performance. The problem with incentive pay is that it encourages executives to accept unreasonable long-term risks for immediate income that increases incentive pay for that year. Agreements regarding incentive pay should be monitored as tightly as any other form of compensation.

The adverse consequences of unjustifiable executive compensation add up to more than what compensation gets paid out. It puts the company at a disadvantage when negotiating with unions, it creates cynicism among the other employees of the company and it understandably causes a lack of willingness by the public to provide taxpayer-funded bailouts when the economy turns sour.

Rob Hassett is a corporate and technology lawyer with the Atlanta law firm of Casey Gilson P.C.