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REINING IN EXECUTIVE PAY

Joel Gemunder, the CEO of Omnicare, retired on July 31, almost exactly one year after his company announced a wide array of wage cuts and layoffs. The former head of the nation’s top provider of pharmaceuticals for seniors won’t have to worry much about his economic security. He’s walking into his golden years with a getaway package worth at least $130 million. Gemunder’s sweet deal only hints at the excess still pulsing through America’s executive suites.

Since 2008, the year the nation collapsed into the Great Recession, 50 major US corporations have each axed more than 3000 jobs. Yet their CEOs, as our just‐released report for the Institute for Policy Studies documents, last year took home 42 percent more pay on average than the S&P 500 CEO average. At America’s top 50 companies, CEO pay — after adjusting for inflation — is running at quadruple the 1980s average and eight times the average in the mid‐20th century.

Is executive pay going to forever trend upward? Or can somebody, anybody, do something? Actually, Congress has just done something. The landmark financial reform legislation passed in July includes reforms advocated [for] for years by those who believe that empowering shareholders will clean up the executive pay mess.

The most notable proposal — shareholder ‘say on pay’ — now stands as the law of the land, not just for financial companies but for all publicly traded US corporations. All shareholders [will] now have the right to express their disapproval of executive pay packages. And, if directors ignore that disapproval, shareholders will soon have the tools, through new SEC regulations, to get their own director candidates on corporate board ballots.

Point by point, Congress has codified almost the entire shareholder‐driven agenda for pay reform. Among other things, corporate board compensation committees must be independent, and corporations must disclose how their executive pay relates to actual financial performance. These are all positive steps. But will they end the outrageous incentives for reckless executive misbehaviour that excessive rewards create? Unfortunately, no.

All these reforms rest on the shaky assumption that shareholders, once suitably empowered, will rise up and end executive pay excess. We don’t make this assumption for other corporate problems. We don’t, for instance, expect shareholders to prevent corporations from poisoning our water or employing child labour. We endeavour, instead, to enact laws and regulations to prevent such practices. So, why should we rely on shareholders to fix executive pay?

We’re all stakeholders, after all, in executive pay decisions, either as consumers or workers or residents of communities where corporations operate. In recent years, executives chasing after paycheck jackpots have engaged in actions that have put us all at risk, such as toxic securities and job‐killing mergers. Why should we leave the responsibility for executive pay decisions to shareholders and shareholders alone? Instead, we can start with a different assumption: that our tax dollars must in no way subsidise executive excess.

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