Reflecting the hostile anti-business sentiment of the Democratic majority in Congress, the U.S House of Representatives recently passed the “The Shareholder Vote on Executive Compensation Act” on April 20. Commonly known as “say on pay”, the bill mandates a nonbinding vote on compensation for corporate executives. Congressman Barney Frank (D., Mass) Chairman of the House Financial Services Committee and bill author said, “There are unfortunately a lot of examples of excessive compensation for CEOs.” Presidential hopeful Sen. Barrack Obama is expected to introduce a companion bill in the Senate.
The high profile examples of large payouts to exiting CEOs provided the impetus for the Democratic majority in Congress to justify federal interference.
Predictably, the liberal solution to executive compensation is regulation. Congressional backers of the bill cite statistics that the median salary of about 1400 CEOs in 2005 is $13.51 million in total compensation. In addition, the difference in salary between workers and CEOs has expanded from 140 times the pay of an average worker to about 500 times.
The bill requires the Security and Exchange Commission (SEC) to mandate inclusion of a shareholder proposal on executive compensation annual proxy statements issued by companies. While the vote is nonbinding and therefore only advisory, the rule will serve to influence the boards of directors who are responsible for setting compensation. "We don't think boards of directors will lightly disregard an advisory opinion from the shareholders," said Rep. Barney Frank.
On the surface, “say on pay” seems like a harmless exercise in corporate governance giving shareholders an opportunity to voice their opinion regarding executive compensation. However, when viewed in the larger context of the liberal attack on capitalism, the collectivism undercurrent reveals a more menacing threat.
For years, the Left has taken every opportunity to brand CEOs and corporations as a menace to society. Effectively using rare cases of corporate corruption (Enron, WorldCom) and “excessive” pay (Home Depot, Pfizer) – liberal politicians, activist organizations and media allies have successfully labeled corporations as an institution of greed, corruption and deception.
Like many Left-wing positions, “excessive” compensation is selectively applied to business leaders while sports stars and Hollywood entertainers are immune from attack. For example, in baseball, salaries are exploding with 11 contracts paying over $100 million. Alex Rodriguez of the New York Yankees is the highest paid player with a 10-year $252 million deal. In Hollywood, Oprah Winfrey is a billionaire and makes an estimated $225 million annually.
In the liberal mind, CEOs making multi-million salaries is greed and company’s making record profits is evil and suitable for populist looting. Recall Hillary Clinton’s speech at the Democratic National Committee winter meeting “The other day the oil companies recorded the highest profits in the history of the world. I want to take those profits.”
Clearly, corporate executives are well compensated and some are overpaid. However, the best way to address this issue is through existing free-market mechanisms on a case-by-case basis and not thorough the one size fits all federal regulation.
The boards of directors of public companies are accountable to shareholders – they have specific knowledge of the company, the industry and the business skills required to enhance growth and profitability. If shareholders feel executive compensation is exorbitant, they can file a shareholder proposal on compensation and/or vote against the board of directors. In fact, many shareholders already use this process to challenge executive compensation. According to Institutional Shareholder Services this year union pension funds filed over 60 "say on pay" proposals.
The problem with “say on pay” is it mandates a vote on executive compensation in every public company thereby transforming shareholder meetings into annual campaigns on executive pay packages. By doing so, it provides a yearly ritual for the agents of socialism – union pension funds, liberal media and activist groups – to plant the seeds of public resentment. Further erosion of public sentiment of business leaders will provide a breeding ground for statist and collectivist solutions that favor wealth redistribution and regulation over free-markets.
Then there are the unintended consequences. Company response to pressure on compensation could result in driving business talent to private companies where pay is not subject to popular opinion. In addition, CEOs may increase their attention to short-term profits to justify pay rather than investing long-term business strategies.
Unfortunately, some company leaders are seeking to appease critics. By implementing elements of corporate social responsibility (CSR) where critic groups are classified as stakeholders, companies like JPMorgan Chase and Pfizer are talking with union shareholders about allowing annual votes on executive compensation.
While an individual company decision is preferable to federal regulation, these appeasement efforts only sanction the anti-business community and their jihad on pay. In the real world, labor unions and other social activists are not stakeholders but competitors. They view compensation as a zero sum game where every dollar that goes to an executive comes out of their pocket.
There is much more at stake here than executive compensation. In a global economy, jobs economic growth and prosperity depend on a business climate that encourages risk taking and innovation free from unnecessary regulatory burdens that hamper free enterprise. To meet that challenge we need business leaders willing to defend the overriding principles of capitalism including their own compensation from the agents of the Left.