The Most Surprising Nay on Pay Yet

Sam Pizzigati

A perfectly respectable business panel is urging corporate boards to ditch the ridiculous rationalizations for CEO pay excess and narrow the gargantuan corporate pay gap. Step one: end CEO stock options.

In Corporate America, the emperors have no clothes.

The entire edifice of mega-million CEO pay, suggests an unexpectedly bold new policy statement from a prestigious Canadian business study panel, rests on assumptions so implausibly inane that only the seriously deluded could ever hold them dear.

The new statement — from Canada’s Institute for Governance of Private and Public Organizations — calls on corporate boards to eliminate from CEO pay packages the stock options that have ballooned executive paychecks in both Canada and the United States.

But the new policy paper doesn’t just recommend overhauling how today’s corporate executives get paid. The paper takes direct aim at how much. Pay for Value: Cutting the Gordian Knot of Executive Compensation urges “a fair and productive relationship” between executive and worker pay.

What makes these urgings so striking? They come from eminently respectable representatives of Canada’s corporate director and investor communities, all deliberating under the auspices of an equally respectable academic center, Montreal’s John Molson School of Business.

What makes this new policy statement even more striking: The respectables who’ve endorsed it haven’t swallowed the conventional media and political wisdom on CEO pay reform. They don’t celebrate those institutional investors — pension funds and the like — that reduce reforming CEO pay to a matter of making sure that corporate boards only “pay for performance.”

These institutional investors, Pay for Value argues, have become part of the problem. They buy into the same bogus assumptions about rewards and markets that have jumped executive pay levels nine-fold over recent decades.

Most alarmingly, these institutional investors continue to insist that executive compensation, short- and long-term alike, must be linked to a “performance” that changes in share price value can somehow accurately measure.

Institutional investors consider stock options — and other rewards linked to share values — “at-risk compensation.” With this “at-risk compensation,” the assumption goes, executives only realize ample rewards if they create real marketplace value for shareholders.

But this faith in the “efficiency” of markets, this trust in share trading values as a marker that can sort out good from bad executive “performance,” cannot withstand even the most casual of reality checks.

“Numerous factors beyond the control of management,” as Pay for Value points out, drive share prices. Stock market booms lift all boats, and those fortunate enough to occupy a boom-time captain’s chair “become very rich.”

And if a market boom should stumble, enterprising CEOs can always game share prices on individual stocks “through accounting gimmickry” or kindle the “infatuations” and “mass hysteria” that can send a share price soaring.

The Canadians behind Pay for Value spend most of their paper discussing executive pay in the United States. They trace CEO pay’s evolution from the “managerial capitalism” of the mid 20th century to a late-century “financial capitalism” totally devoted to maximizing “shareholder value.”

Under “managerial capitalism,” shareholders typically held on to their shares six to eight years, share price fluctuations had next to no impact on the annual cash salary and bonus that made up the bulk of CEO pay, and compensation for top executives averaged no more than 30 times worker pay.

Under “financial capitalism,” the average holding period for shares of stock dropped to under a year, and share price fluctuations came to determine the bulk of executive compensation. Top execs now take home hundreds of times the paychecks that go to their workers.

This new corporate pay pattern has now become “standardized.” Virtually all major companies,” notes Pay for Value, sport the same executive pay line-up of salaries, bonus, stock awards, and exceedingly generous pension benefits.

These generous pension — and related severance — benefits effectively insulate CEOs from any iota of real “risk.” Whatever happens, they’ll still pocket mega millions at the end of the day. That “high risk-high reward” justification for our North American executive pay status quo, notes Pay for Value, “rings hollow.”

And this ringing, in all its tones, has a toxic impact on enterprise life.

“Social trust, reciprocity, loyalty, sharing of goals, and pride in the organization,” observes Pay for Value, “will dissipate slowly but surely where compensation schemes are viewed by employees as unfair and dramatically skewed in favor of the few.”

Adds the analysis: “Without the cementing property of these values, without the surplus meaning that they bestow on work in organizations, a business firm soon becomes a marketplace for mercenaries, unmanageable and fragile.”

But the authors of Pay for Value, after this eloquent denunciation of top-heavy corporate reward systems, shrink back in horror from the one already legislated CEO pay reform that could advance their pay reform agenda. They refuse to endorse the pay ratio disclosure mandate enacted in the 2010 Dodd-Frank bill.

This Dodd-Frank mandate requires that all publicly traded corporations annually reveal the ratio between their CEO and median worker pay. What better way to encourage corporate boards to adopt, as Pay for Value advises, a pay ratio between execs and workers that will seem “fair” in the “social, cultural and industrial circumstances within which the company operates.”

Pay for Value inexplicably gags on this disclosure notion. Such disclosure, the paper argues, might provide “fodder for sensationalistic reporting.” Corporations should only “have to declare in official filings that their board of directors has adopted policies on fair and equitable compensation.”

Sign up for To MuchA truly bizarre position. Canada’s Institute for Governance of Private and Public Organizations is arguing, in effect, that we should trust corporate boards, in the absence of the public oversight that ratio disclosure would enable, to voluntarily set reasonable pay ratios between top and bottom within their enterprises.

Corporate groups will no doubt seize on this Pay for Value opposition to Dodd-Frank’s pay ratio disclosure mandate. They’ll use this opposition to advance their ongoing — and so far successful — lobbying campaign to stall the new mandate’s enforcement.

The rest of us can honor the spirit of the Pay for Value’s overall analysis by urging regulators at the Securities and Exchange Commission, the federal watchdog over Wall Street, to stop dragging their feet and start issuing the regulations needed to put the Dodd-Frank disclosure mandate into play.

A campaign to press the SEC on pay ratio disclosure is already underway. This campaign needs to succeed.

“Fundamental changes in compensation practices,” as the authors of Pay for Value themselves put it, “will happen only if and when management’s performance is measured more by the way the company meets its broader obligations and less by growth in earnings per share and by meeting the quarterly earnings expectations of analysts.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Institute for Policy Studies. Read the current issue or sign up here to receive Too Much in your email inbox.

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