Wading Outside the CEO Pay Reform Mainstream

To be effective, the lead executive pay reformer in Congress is now understanding, executive pay reform needs to go well beyond empowering shareholders.

Barney Frank, the colorful Massachusetts Democrat, may be the most caustic quipster in Congress. Ask the nation’s excessively overpaid CEOs. They’ve felt the Frank sting. Why do executives already making millions of dollars a year, as Frank asked [1] in one typical aside back in 2005, need bonuses on top of those multiple millions?

“Are our top executives of such weak moral fiber,” the veteran lawmaker went on to wonder, “that they can't do their duties unless they're substantially bribed to do the right thing?”

“An average CEO,” Frank would observe [2] a year later, “makes more before lunch on his first day of work than a minimum wage earner will make all year.”

In 2007, Frank gained a new position that gave him an opportunity to actually rein in that over-the-top executive excess. The new Democratic majority in Congress, elected the previous November, made him the chair of the powerful House Financial Services Committee.

Frank moved quickly, as chair, to take on executive pay. But he moved cautiously, too. In public statements, the outspoken legislator suddenly seemed to place more emphasis on empowering shareholders than curbing outrageously massive executive windfalls.

“We need to find some way to legislate greater shareholder involvement in setting CEO salaries,” Frank told [3] a Washington “regulation summit” early in 2007.

And if shareholders should then bless a massive executive reward, so be it. After all, as Frank noted after news reports revealed a $210 million severance package for outgoing Home Depot CEO Robert Nardelli, “the shareholders own the company.”

“If the shareholders want to pay Nardelli that kind of money,” Frank added, “then they have a right to do that.”

In the typical U.S. corporation, of course, that shareholder right to impact executive pay has been next to impossible to exercise. Corporate boards and top execs routinely make cozy sweetheart deals that keep CEO pay spiraling ever upward, in good times and bad — and shareholders have no say whatsoever.

Mandating that shareholders get a say, many executive pay reformers believe, would discourage that insider dealing — and keep corporate boards from lavishing windfalls on undeserving CEOs. Over recent years, this “say on pay” notion has emerged as the most mainstream — and politically safe — executive pay reform.

Lawmakers who support “say on pay” get the best of all possible worlds. By backing a mandate that gives shareholders the right to take advisory votes on executive pay, they can demonstrate to voters angry about CEO compensation that they’re “doing something” to fix the problem. At the same time, talking about shareholder rights helps them avoid coming across as “anti-business.”

But “say on pay,” as a strategy for actually curbing executive pay outrages, has a bit of a problem. Other nations have implemented “say on pay” laws, and these laws haven’t done much at all to end executive excess.  

The UK, for instance, has had “say on pay” on the books since 2002. Despite this “say on pay” mandate, a Yale business school expert acknowledged at a 2007 Financial Services Committee hearing, British executive pay hikes have continued [4] “to exceed inflation and average workforce wage increases.”

This lackluster track record hasn’t dimmed the political appeal of “say on pay.” Reform-minded lawmakers in Congress, led by Barney Frank, have over recent years continued to champion shareholder empowerment as the single most essential antidote to executive excess.

So reformers who favor a more direct approach to fighting executive excess weren’t expecting much last week when the House Financial Services panel met to mark up Barney Frank’s latest executive pay reform legislation.

The bill, as expected, carried a provision mandating “say on pay” at publicly traded corporations and various other corporate governance reforms meant to discourage insider dealings between CEOs and corporate boards.

But the bill, in a surprise, didn’t stop there. The legislation [5] Barney Frank brought forth didn’t just empower shareholders. The bill gave federal regulators the statutory authority to prohibit any financial industry “incentive-based payment arrangement” that encourages power-suits to take risks that “could have serious adverse effects” on the nation’s “economic conditions or financial stability.”

[6]In other words, under Frank’s legislation, federal regulators would have the power to ban the sort of pay deals that encouraged the reckless behaviors that nearly collapsed the U.S. economy last September.

Frank’s bill, after winning a Financial Services panel green light Thursday, passed the House by a 237-185 margin Friday.

The bill, as currently written, will now likely get no further. Business press reports see [7] the Frank legislation’s prohibition against “perverse incentives” dying next month in the Senate. But the House passage, even so, does represent a breakthrough, and a significant one at that.

A House majority, for the first time, has recognized that all Americans, not just shareholders, have a stake in limiting the rewards at the top — because those rewards, if large enough, give execs at that top an incentive to engage in behaviors that can wreck an entire economy.

“Our nation is in the worst economic crisis since the Great Depression,” as Rep. Elijah Cummings from Maryland put it [8] before Friday’s House vote, “in large part because of the reckless, risky decisions that were taken by executives incentivized by excessive compensation packages.”

The executive pay debate, in effect, has undergone something of a seismic shift. The top mainstream reform legislative goal  — to help shareholders deny windfalls to executives who perform poorly — now seems distinctly inadequate and outdated. Barney Frank has waded out of that mainstream and convinced a majority of his House colleagues to go along.

That’s not near enough yet to beat back corporate greed. But that’s progress.

Sam Pizzigati edits Too Much [9], the online weekly on excess and inequality.