Most Execs Shouldn’t Fear New Shareholder Powers

This is what will not happen, now that the average shareholder can voice an opinion on the pay levels of corporate executives:

* Every chief executive’s salary will be slashed 80%, just on principle--because people are mad as hell and they don’t want CEOs raking it in anymore.

* Companies no longer will be able to attract talented executives, so American business will begin a long and painful slide, with the final result that . . .

* . . . America will become a socialist welfare state of lazy, whiny workers, and all the entrepreneurs willleave for Kyrgyzstan or somewhere else on the Unified Team.

Sadly, those probably sum up the ridiculous notions floating around the brains of certain CEOs and corporate directors today. When the Securities and Exchange Commission on Thursday took the historic step of allowing shareholders to express their views on executive pay--via non-binding annual proxy votes--it no doubt frightened and angered more than a few captains of industry.

It’s tough to know exactly what CEOs and directors think about this issue, though, because it’s nearly impossible to find one who will discuss it in public. Their reticence suggests that many view the rising debate over executive pay as blatant, hateful corporation-bashing that can only damage American business in the end.

But it isn’t, and it won’t. Almost certainly, most shareholder resolutions that suggest capping, cutting or otherwise limiting executive pay will fail this spring and forever.

In a few cases, however, the resolutions may either pass or lose by only a small margin. And those are sure to be the cases where executives are indeed being grossly overcompensated--either with cash, bonuses, or stock options--when measured against the performance of their company and the success of its shareholders and employees.

Figure it this way: The SEC move merely allows for the cleanup of one of the last vestiges of 1980s-style greed.

That decade’s villains--Michael Milken, leveraged buyouts, takeovers and corporate “greenmail” (wherein one powerful shareholder could enrich himself at the expense of others)--have all gone the way of the dinosaurs. But the corporate pay structure that those people and events created remains.

Before Milken went to jail, he and his takeover mania taught a lot of CEOs and corporate boards how to enrich themselves. Problem is, they haven’t stopped, even though in many cases their shareholders and workers have suffered terribly since 1989 because of the lousy economy.

For whatever reason, corporate directors who approved lavish, ever-rising pay and perks for their executives in the 1980s have been unwilling or unable to question the legitimacy of that compensation in a new, more sober era. And until now, the SEC has forbidden shareholders from shoving that issue into directors’ faces.

Ed Lawler, a USC business professor, notes that this isn’t the first time executive compensation has sparked public debate. Lawler and UC Berkeley Prof. Graef Crystal, one of the most visible executive-pay critics, sat on committees that studied pay versus performance in the early 1980s.

The argument then was that executives should sacrifice some of their base cash compensation in favor of more “risk-based” compensation--say, in the form of stock options--that would reward them only if they indeed guided their companies to better performance and growth.

What happened, Lawler says, is that “many companies did add the risk-based compensation--but they added it on top of the base compensation.” The result: Today’s gigantic executive pay packages that reward many executives handsomely no matter what happens to their company’s bottom line, or to their stock.

Is there any good reason why individual shareholders shouldn’t have a way to express their views of these pay packages?

Richard Lesher, head of the U.S. Chamber of Commerce, worries that once government allows the pay issue to be forced onto corporate proxy statements, it could unleash a torrent of new regulation aimed at imagined corporate abuses. “It really is ironic,” Lesher says, “that you have this movement toward more government control in this country while the rest of the world is trying to shake it off.”

Perhaps an even greater worry, he says, is that executive pay is being used as a lightning rod for the social stress that our society is enduring in this worst economic downturn since the Depression. “This whole presidential campaign is about class warfare,” Lesher contends.

The SEC, however, is hardly trying to contribute to a class war. All the agency has done is to get out of the way and let shareholders’ voices be heard.

The executive-pay debates now certain to take place at this spring’s annual meetings will ultimately focus on fairness and performance. And Albert Nicholas, a veteran money manager whose Milwaukee firm manages $3.7 billion for clients, has no doubt that the majority of individual and institutional shareholders will accurately judge what is fair pay and good performance.

“People have a lot of common sense,” Nicholas says. “I think they understand more than some of these executives think they do. I think it’s good to get this issue out in the open.”

Are you listening, Mr. and Ms. Corporate Director? Remember--you work for the shareholders, and management works for you.

Shareholders Get a Say on Pay

The Securities and Exchange Commission on Thursday said it will begin allowing non-binding shareholder votes on executive compensation issues. The first 10 companies that were told they must allow such votes, and what shareholders want on the ballot in each case:

* Aetna Life & Casualty Co.: Cut directors’ retainer fees every time they miss a board meeting.

* Baltimore Gas & Electric Co.: Cap corporate officers’ compensation at 20 times the pay of the average employee.

* Battle Mountain Gold Co.: Cut management salaries and stock options until the company becomes more profitable.

* Bell Atlantic Corp.: Abolish short-term incentive plans for senior managers.

* Black Hills Corp.: Eliminate a corporate retirement plan for outside directors.

* Chrysler Corp.: Bar revaluing stock option plans for executives.

* Eastman Kodak Co.: Disclose executives’ severance pay packages.

* Equimark Corp.: Prohibit executives’ severance pay if corporate performance was below a certain standard in the preceding three years.

* Grumman Corp.: Prohibit executive bonuses unless dividends paid to shareholders reach a specified limit.

* IBM Corp.: Include more details in future proxy statements on corporate officers’ compensation and justification of salary and incentives.

The Warning Signs of Overpaid Executives

University of California Prof. Graef Crystal, one of the nation’s top authorities on executive pay, says these are some of the danger signals of compensation “heading out of control.”

* An executive’s total pay package is “ultra-high” compared to other companies of similar size.

* Annual bonuses are guaranteed rather than related to the company’s performance.

* Executives enjoy multiple long-term incentive pay plans, rather than one basic plan. Also, executives are guaranteed some minimum payout from incentive plans, regardless of performance.

* A company’s stock option plan can be revised to lower executives’ option-exercise price if the market price of the stock drops.

* An executive enjoys excessive perquisites, such as in-town apartments, multiple country club memberships, low-interest loans, etc.

* MAIN STORY: A1