Deflating Golden Chutes
Each day brings another example of a highly paid executive caught with his hand--legally--in the corporate cookie jar. E-Trade Group Inc. last year lost $241 million; its board of directors now is scrambling to defend its chairman’s $80-million compensation package. A judge in Chicago has ordered Kmart Corp. to explain lavish severance packages granted as the company tumbled into bankruptcy. These are just two of this month’s developments.
What’s to be done? Congress and the Securities and Exchange Commission could lead by forcing corporations to register stock options granted to executives as an expense on their income statements. Options packages, which were designed to let executives share in the wealth as stock prices rose, have gotten more devious in recent years. Boards of directors sometimes even reissue stock options to executives at a lower base price if the stock loses value. What kind of incentive is that? It’s not a deal that stockholders are offered.
Option deals have exploded in recent years, according to the Council on Institutional Investors. Shareholders, though, must wade through complicated footnotes in financial statements to uncover, for instance, that their company has issued hundreds of thousands of shares at rock-bottom prices that will eat up potential profit when exercised. The impact of options on a company’s bottom line should be up front, not in the tiny type.
Powerful institutional investors, including the California Public Employees’ Retirement System, should continue to push corporate boards of directors to be more accountable. Bank of America Corp. shareholders, led by union pension funds, last month surprised management by passing a resolution that called for limits on severance packages. A threatened strike by Las Vegas casino workers is being fueled in part by allegations that recent layoffs were driven more by executives’ concern over their own stock options than the post-Sept. 11 travel slowdown.
Excessive executive compensation is only a symptom of a deeper problem--that boards of directors are paying more attention to executives’ happiness than shareholder value.
Stock exchanges, which set rules of corporate governance for publicly traded stocks, should do more. They could, for instance, require publicly traded companies to adopt term limits for boards of directors, limit the number of a company’s executives that may serve on its board and forbid executives to sit on their own firms’ compensation committees.
A positive sign out of Washington in the wake of Enron Corp.’s failure is that the SEC is paying more attention to the actions of top executives in possible corporate wrongdoing.
There’s nothing wrong with fat paychecks. They’re part and parcel of the American dream. But they should be earned, and not at the expense of shareholders and employees.
