The Foxes Are Still Guarding the Henhouse
The resignation of Richard Grasso as chairman of the New York Stock Exchange is remarkable: Unlike other corporate scandals involving alleged accounting fraud or executive wrongdoing, a chief executive has stepped down solely in response to controversy surrounding his own compensation.
But does this mean the culture of Wall Street has finally turned against excessive executive compensation? Hardly.
By any standard, many of today’s executive compensation packages are excessive. The lavish retirement lifestyle of former General Electric Chairman Jack Welch -- including corporate jets, posh housing, country club memberships and wine and laundry services -- that was disclosed during divorce proceedings is but one example. These executive-pay excesses come at the expense of shareholders as well as the company and its employees.
A reasonable and just compensation system for both executives and workers is fundamental to the creation of long-term corporate value. However, the last two decades have seen an unprecedented growth in compensation for top executives and a dramatic increase in the gap between the compensation of executives and rank-and-file workers. Today’s average CEO receives 282 times the average worker’s paycheck.
Grasso’s defenders say his $139.5 million compensation package was comparable to that of other corporate CEOs. They were right, and that is the real scandal: Exorbitant executive retirement packages are common throughout the corporate and financial worlds.
If this were happening when the economy was booming and profits were climbing, that would be one thing. But executives have received extraordinary retirement benefits at the same time workers are being asked to bear increased risk for their retirement security.
Today, less than half of all workers receive any retirement benefits from their employers. Those who do are more likely to have less-secure defined-contribution 401(k) plans rather than defined-benefit pension plans. These retirement savings are dependent in part on the stock market. Since the stock market peak in March 2000, about $5 trillion in shareholder value has been erased in the worst decline since the Great Depression.
By contrast, many executive retirement plans promise a lifetime of income far exceeding what the recipients would be entitled to under the retirement plans of their rank-and-file workers. These preferential retirement benefits undermine the goal of linking pay to performance: CEOs who have been guaranteed million-dollar retirement benefits are inherently less concerned if their stock options are underwater.
All workers should have the same retirement security that executives have, but nobody should have the kind of abusive features that are common in many executive retirement plans. These plans are often pumped up with years of service not actually worked by the executive, preferential benefit formulas or accelerated vesting of pension benefits. Executives’ deferred-compensation plans may offer enhanced matching contributions by the company or company-guaranteed above-market interest rates.
Executives have used these preferential retirement benefits as an under-the-radar means to increase their compensation without triggering a backlash among shareholders, employees and the public. But now, after the collapse of Enron, investor apathy is starting to change. This year, a majority of shareholders at 10 companies, including Tyco, Hewlett-Packard and Alcoa, voted for union-sponsored proposals to limit the use of golden parachutes. Other companies, including Coca-Cola and General Electric, reformed their preferential executive retirement plans.
But investor activism can bring about widespread reform only if investors’ rights are broadened. That’s because ultimate responsibility for excessive executive compensation falls on the boards of directors that design and approve CEO pay packages -- but boards of directors are handpicked by incumbent management. And too often, these directors have potential conflicts of interest and are well-paid CEOs in their own right.
It’s a self-perpetuating system that will begin to be checked only when investors can nominate their own representatives for election as directors. Allowing investors to nominate their own candidates would go a long way toward reforming excessive CEO pay. For this reason, the labor movement strongly supports proposed changes to the directors’ election process that have been recommended by the Securities and Exchange Commission staff and embraced by the SEC’s chairman.
Sadly, the executive compensation practices that led to Grasso’s resignation mirror those of corporate America. Grasso’s package, like scandalous executive pay at many companies, resulted from a flawed corporate governance system.
We have to change more than the players. We have to change the system.
