Executive compensation: in a culture of greed and selfishness is there room for a theory of 'enough'.

• Author: Downs, Robert C.

INTRODUCTION

Apple handed new CEO Timothy Cook a compensation package of more than $377 million as he took over the company in 2011. (1) Lawrence Ellison pulled in more than $77 million that same year as Chief Executive of Oracle Corp. (2) In 2009, Gregory B. Maffei, CEO of Liberty Media Corporation had compensation of $87,493,565. (3) That same year, H. Lawrence Culp, CEO of Danaher Corporation, "earned" about $141,400,000. (4) Lawrence J. Ellison, CEO of Oracle took home $130,200,000. (5) In 2011, the 100 highest paid CEOs each made over $17,900,000. (6) In 1996's contentious ending of Michael S. Ovitz's employment as President of The Walt Disney Company, Mr. Ovitz walked away with about $130,000,000 for about fourteen months of work. (7) That equals nearly $10,000,000 per month.

In 1970, salary and bonus packages of CEOs averaged about $700,000, which was then about twenty-five times the average salary of a production worker. (8) By 2000, that multiple had jumped to ninety, (9) (525 for a majority of Standard & Poor's 500 Index companies) and by 2011, the multiple decreased to 380 for the same Standard & Poor's 500 Index companies. (10) Whatever the multiple, the difference between CEO compensation and that of the typical production employee has become enormous. Such disparities in income, and the actual amounts paid to Chief Executive Officers as well as other executive officers of publicly traded companies has elicited a range of responses including absolute outrage (11) and accusations of excessive greed, suggestions for governmental regulation of executive compensation, (12) and defensive commentary that attempts to justify the high compensation as "earned" by talented valuable executives. (13)

This article is, frankly, premised upon an unabashed opinion that compensation for chief executive officers and other high-level executives of publicly traded companies has run amuck. It is now clear that attempts to regulate and limit excessive compensation have had little, if any, positive effect, and may actually have contributed to the acceleration of the rate of increase. (14) Section I includes an analysis of the causes of such extraordinary high compensation packages and the public's reaction to disclosures of those amounts. Section II includes an evaluation of the various attempts at controlling excessive compensation, as well as proposals that have been advanced to accomplish that end. Section III includes the proposal to adopt a standard of "Enough" that will place reasonable limits on uncontrolled greed.

SECTION I

1. How We Got Here--Causes

   The history of executive compensation reveals an increasing disparity in pay between high-level executives and typical production workers. (15) Whether that is worthy of concern depends, at least in part, upon one's point of view. (16) High-level executives and their defenders claim that the compensation is "earned," (17) while production line employees (particularly those who have lost their jobs) and other critics are less convinced. (18) Also, it is not only the chief executive officers who receive the large packages. A review of 10K reports of publicly traded companies (19) reveals that many other lower level executives are paid millions of dollars annually and participate in generous stock option incentive plans. (20) Indeed, to focus only on the top executives tends to mask the total amount of corporate funds directed to executive compensation, in one form or another.

   It is now well accepted that executive compensation has increased dramatically over the past three or four decades, exceeding the wages of other employees by large multiples, and is not accounted for by inflation or an increase in productivity. (21) The size and complexity of major corporations has increased, but the discussion still focuses on the 500 or so largest U.S. corporations and the positions of highest responsibility in those corporations.

   Perhaps the increases are due to the systemic manner in which executive compensation is determined. In publicly held companies, the Board of Directors establishes a compensation committee (22) that makes recommendations to the Board. These compensation committees typically engage advisors with expertise in determining compensation levels. (23) In determining what the compensation package for new or continuing executives should be, expert advisors look at a number of factors including the size of the company, the position under consideration, the experience and talent of the executive, and the amounts currently being paid by other comparable companies to comparable executives. (24) The process typically produces a range of compensation figures. (25) The compensation committee and ultimately, the Board of Directors, are faced with choosing an amount within that compensation range for the executive. By this point in the process, the Board has already decided that the prospect is the best person for the job, that there is a good fit, and that it is the corporation's best interests to make the hire. Under these circumstances it is unlikely that the Board will select a number that is toward the low end of the spectrum, and unlikely that the executive will be very impressed with an offer at the low end.

   If executives are hired at above average compensation most of the time, each such new hire will have the effect of increasing the average compensation amount for that level of employee in the market place. In addition, typical compensation packages provide for raises over time, or raises are otherwise granted by the Board. Since corporate executives in the highest positions tend to have a fairly high turnover rate, (26) the upward pressure on executive compensation has a dramatic effect over time. (27) Additionally, there is not any countervailing market force to stem the advance of increasing compensation. The supply of capable corporate executives may not increase or decrease much, if any, due to demands for their services. Most top executives have come up through the ranks at the same employer or another corporation, and most have many years of experience. The lag time between an increased or decreased need for their services is ten to twenty years after they decide upon a career choice and enter the work force. Likewise, the demand for high quality executive talent is not reduced much by hard times in the general economy. Corporations in trouble, facing reduced profits, market share and increased competition, may well strive even harder to obtain the services of the best leaders available. Those leaders are less inclined to accept employment by a troubled business unless the financial rewards are at the high end of the range of reasonableness. (28) Thus, neither the market nor the present system of selecting top executives can be depended upon to curb the ever-escalating executive pay.

2. "No Man Can Be Worth $11900,000 A Year" (29)--Public Reaction

   Well then, if not $1,000,000, how about $10,000,000 or $100,000,000 a year? As in the 1930s depression era, (30) the public outcry against excessive executive compensation has risen to dramatic new heights, coming from ordinary people, (31) labor unions, (32) and elected officials including the President of the United States. (33) When ordinary people become unemployed or underemployed, risking or experiencing the loss of income and self-worth, and are losing their homes in record numbers, it is understandable that they would be offended and perhaps outraged at public disclosures of salaries in the millions of dollars per year. Washington D.C. heard this outrage, evidenced by President Obama's "rhetorical assault" on executive bonuses, and by the advancement of proposals to curb executive compensation. (34)

   SECTION II

1. Past Efforts and Current Proposals to Control Skyrocketing Compensation

   1. Judicial Review

      Executive compensation has historically been a matter of state corporate law. (35) Even when the amount appears obscene, courts have deferred to the business judgment rule, permitting the decision to be made by the board of directors of the particular corporation. (36) The doctrine of corporate waste has also not been effective to curb amazingly high payments. (37) It also seems unlikely that the judiciary or legislature of any single state will, alone, establish any rule that would limit executive compensation. The judiciary has stood firmly in favor of the business judgment rule to protect the decisions of directors, and legislatures are loath to adopt rules that might cause corporations to prefer incorporation in another state. Indeed some state legislatures have adopted specific provisions taking executive compensation out of the definition of "interested transactions" and thus removing executive compensation from the closer scrutiny that "interested transactions" are subjected to. (38) In any event, the large publicly traded corporations, which are most typically accused of paying excessive compensation, have little trouble passing muster under such statutes, because they typically have sufficient "independent" directors on the board to approve the compensation packages without direct involvement or voting by the compensation recipients.

   2. Income Tax Remedies

      The United States Congress has attempted to rein in excess executive compensation by amending the Internal Revenue Code to disadvantage such payments. Specifically, such efforts include limiting the deductibility of golden parachute payments by the corporation (39) and charging the executive with an additional twenty percent excise tax on the excess parachute payment. (40) However, the corporation, on behalf of the executive, often pays this excise tax. (41) For example, when a $1,000,000 excess parachute payment is made, it actually costs the corporation $1,499,988, thus damaging the corporation's shareholders by both the increased payments and by the non-deductibility of the amounts paid. (42) As a result, the shareholders of...