Bill Targets Executive Compensation
Investor groups rallied around legislation introduced Thursday that would require companies to reveal more details about executive salaries and perks and would give shareholders the power to block pay plans, bonuses and “golden parachutes.”
The Protection Against Executive Compensation Abuse Act, sponsored by Rep. Barney Frank (D-Mass.), takes aim at what shareholder activists say is their next big target -- pay for chief executives.
Since the Enron Corp. scandal broke four years ago, the government has tightened rules related to corporate accounting, conflicts of interest and executive oversight. But compensation issues have been left to corporate boards.
In introducing the legislation, Frank said that executive pay took an increasing bite out of shareholder returns but often bore little relation to a company’s financial performance.
He cited a study showing that in 2003 the top five executives at each U.S. public company received compensation that on average amounted to 10.3% of their employer’s profit, up from 4.8% in 1993.
“This is not an assault on corporate America,” Frank said, acknowledging that his measure would face strong opposition from business. “It empowers stockholders to get a handle on pay. This is all about enlightened self-interest. We’re telling companies you have to do a better job. But we are not prescribing a particular solution.”
The Business Roundtable, a lobbying group for large companies, said it would oppose the measure -- although spokeswoman Tita Freeman said it hadn’t reviewed the proposal carefully enough to articulate why.
Frank’s bill drew immediate support from leaders of groups representing mutual funds and other large investors, including the Council of Institutional Investors and Institutional Shareholder Services, as well as the AFL-CIO.
The bill would require publicly traded companies to:
* Provide all details about how much executives earn in cash, incentives and perks each year, and submit the packages for shareholder approval. The measure effectively gives shareholders veto power over excessive pay packages, said Nell Minow, an editor at Corporate Library, a pro-investor research firm.
* Disclose the full market value of company-paid perks, such as an executive’s personal use of a company jet.
Under current rules, companies need to report only “the incremental cost” of perks that are valued at more than $50,000 in their annual proxy statements. Any benefit that is worth less than $50,000 can be ignored, even when there are dozens of them.
Additionally, critics maintain that valuing benefits at incremental cost understates the real worth of the package -- allowing executives to disclose “the cost of gas and the peanuts the executive ate on the private plane without accounting for the cost of the jet,” said Brandon Rees, research analyst with the AFL-CIO’s office of investment.
* Publicly report the specific criteria by which executives earn incentive pay. The bill also requires the Securities and Exchange Commission to issue rules that would force executives to return any bonuses or incentive pay if their company restates its earnings downward within 18 months of when the award was granted.
* Tell shareholders “in a clear and simple form” how much the executive officers stand to make on a proposed takeover or acquisition that requires shareholder consent.
Executives of a company being acquired, for example, often lose their jobs -- but not without negotiating lucrative exit packages for themselves, dubbed golden parachutes. If shareholders felt the severance was overly generous, the bill would let them cut the parachute without voting against the merger.
Frank and others said the bill marked the first serious attempt to allow shareholders to rein in the widening gap between pay for executives and pay for rank-and-file workers.
In 1980, the average CEO earned about 42 times the pay of the average worker, but now CEOs earn about 431 times what the average worker does, according to the AFL-CIO.
And pay is rising at a rapid clip.
The average CEO took home a 91% raise in 2004, according to Corporate Library, even as workers got raises amounting to less than 4% on average.
“We should not congratulate ourselves that we have solved the problem of poor corporate governance as long as executive pay is escalating exponentially and is totally out of sync with corporate performance,” Minow said. “As a return-on-investment matter, these pay packages do not pay off. They should not be permitted without shareholder approval.”
The bill is co-sponsored by Reps. George Miller (D-Martinez) and Martin Sabo (D-Minn.). If the measure survives the committee process, Frank is hopeful of a full House vote next year, when members of Congress will be seeking reelection.
“I think this could be an election issue,” he said.