Auto-correct Changes "Schumer" To "Schemer"-- Remember How Schumer Saved Wall Street Executive Pay Excesses With His Say On Pay Scheme?

I had dinner with an old friend the other day, visiting from Wall Street, where he works with banksters on compliance issues-- although, more often than not, on banksters trying to make it look like they're complying with the law while running end games around those very laws and rules. At one point he started cursing out New York's Senator, Chuck Schumer, recipient, since 1990, of $20,721,989 in legalistic bribes ("campaign contributions") from the Finance Sector, more than any other Member of Congress other than 3 presidential candidates, Obama, McCain and Hillary Clinton. Schumer's take is close to McConnell's and Boehner's combined! But that wasn't why my friend was denouncing him. He was going on about Schumer's little trick in a provision of Dodd-Frank, "Say On Pay."

Remember "Say On Pay?" It gives the owners of companies (shareholders)-- rather than the management-- the right to vote on compensation for top executives, like CEOs and CFOs. Schumer's Wall Street and Big Business financiers wanted nothing to do with it-- but felt vulnerable after their greed and bumbling had just crashed the economy and wrecked the lives of millions and millions of ordinary working families. So... Chuckie Cheese to the rescue. He came up with the idea of allowing for a non-binding vote on executive compensation. It allowed fake liberals like himself to advocate for reform while protecting his corporate donors from that very reform. And that's what made it into Dodd-Frank. Which is why Wall Street gives Schumer so much more more than they give McConnell or Boehner or anyone else in Congress.

Schumer's Shareholder Bill of Rights Act of 2009 required annual votes by stockholders on executive compensation, non-binding, unenforceable, advisory votes. Even defenders of banksters were admitting that over-compensation on Wall Street was a problem, although not a big one. (Thanks to Schumer it's a much worse problem now.)

There is no question but that executive compensation has grown significantly over the last two decades. House Report 110-088, which accompanies H.R.1257, notes that in FY 2005 the median CEO among 1400 large companies “received $13.51 million in total compensation, up 16 percent over FY 2004.” The Report also notes that “in 1991, the average large-company CEO received approximately 140 times the pay of an average worker; in 2003, the ratio was about 500 to 1.”

But so what? Many occupations today carry vast rewards. Lead actors routinely earn $20 million per film. The NBA’s average salary is over $4 million per year. Top investment bankers can earn annual bonuses of $5 to $15 million. Indeed, according to an April 2007 NY Times report, “The highest paid” investment banker on Wall Street in 2006 was Lloyd Blankfein of Goldman Sachs, who “earned $54.3 million in salary, cash, restricted stock and stock options.” Yet, that sum is dwarfed by the pay of private hedge fund managers. The same Time story reports that hedge fund manager James Simons earned $1.7 billion in 2006 and that two other hedge fund managers also cracked the billion dollar level.

Accordingly, unless one’s objection to the amounts received by corporate executives is based solely on the size of those amounts, one must be able to distinguish corporate managers from these other highly paid occupations.

In their book, Pay Without Performance, upon which House Report 110-088 heavily relies, law professors Lucian Bebchuk and Jesse Fried contend that actors and sports stars bargain at arms’-length with their employers, while managers essentially set their own compensation. As a result, they claim, even though managers are under a fiduciary duty to maximize shareholder wealth, executive compensation arrangements often fail to provide executives with proper incentives to do so and may even cause executive and shareholder interests to diverge. In other words, the executive compensation scandal is not the rapid growth of management pay in recent years, but rather the failure of compensation schemes to award high pay only for top performance.

Corporate management is viewed conventionally as a classic principal-agent problem. The literature widely credits Adolf Berle and Gardiner Means with tracing the problem to the separation of ownership and control in public corporations. They observed that shareholders, who conventionally are assumed to own the firm, exercise virtually no control over either day to day operations or long-term policy. Instead, control is exercised by a cadre of professional managers. This “separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge ....”

The literature identifies three particular ways in which the interests of shareholders and managers may diverge. First, and most obviously, managers may shirk-- in the colloquial sense of the word-- by substituting leisure for effort. Second, managers who make significant non-diversifiable investments in firm specific human capital and hold undiversified investment portfolios in which equity of their employer is substantially over-represented, will seek to minimize firm-specific risks that shareholders eliminate through diversification. As a result, managers generally are more risk averse than shareholders would prefer. Third, managers’ claims on the corporation are limited to their tenure with the firm, while the shareholders’ claim have an indefinite life. As a result, managers and shareholders will value cash flows using different time horizons; in particular, managers will place a low value on cash flows likely to be received after their tenure ends.

In theory, these divergences in interest can be ameliorated by executive compensation schemes that realign the interests of corporate managers with those of the shareholders.

According to Bebchuk and Fried, however, boards of directors-- even those nominally independent of management-- have strong incentives to acquiesce in executive compensation that pays managers rents (i.e., amounts in excess of the compensation management would receive if the board had bargained with them at arms’-length). As a result, as their title implies, executives are getting high pay that is largely decoupled from performance incentives.

It is certainly true that directors all too often are chosen de facto by the CEO. Once a director is on the board, pay and other incentives give the director a strong interest in being reelected; in turn, due to the CEO’s considerable influence over selection of the board slate, this gives directors an incentive to stay on the CEO’s good side. Finally, Bebchuk and Fried argue that directors who work closely with top management develop feelings of loyalty and affection for those managers, as well as becoming inculcated with norms of collegiality and team spirit, which induce directors to “go along” with bloated pay packages.

...There is no more basic question in corporate governance than “who decides”? Is a particular decision or oversight task to be assigned to the board of directors, management, or shareholders?

Corporate law generally adopts what I have called “director primacy.” It assigns decision making to the board of directors or the managers to whom the board has properly delegated authority.

Executive compensation is no exception.

The proponents of say on pay often emphasize that HR 1257 proposes only an advisory vote. Yet, the logic of an advisory vote on pay seems to be the same as that underlying precatory shareholder proposals made pursuant to Rule 14a-8. Even though neither is binding, they are nevertheless expected to affect director decisions.

The board of directors as an institution of corporate governance, of course, does not follow inexorably from the necessity for authoritative control. After all, an individual chief executive could serve as the requisite central decision maker. Yet, corporate law vests ultimate control in a board acting collectively rather than in an individual executive. I have elsewhere suggested two reasons for doing so: (1) under certain conditions, groups make better decisions than individuals and (2) group decision making is an important constraint on agency costs. In any event, the key point is that effective corporate governance requires that decision-making authority be vested in a small, discrete central agency rather than in a large, diffuse electorate.

...Given the length and complexity of corporate disclosure documents, especially in a proxy contest where the shareholder is receiving multiple communications from the contending parties, the opportunity cost entailed in becoming informed before voting is quite high and very apparent. In addition, most shareholders’ holdings are too small to have any significant effect on the vote’s outcome. Accordingly, shareholders can be expected to assign a relatively low value to the expected benefits of careful consideration. Shareholders are thus rationally apathetic. For the average shareholder, the necessary investment of time and effort in making informed voting decisions simply is not worthwhile.

Most shareholders recognize that they are better off pursuing a policy of rational apathy rather than an activist agenda. They know that directors have better information and better incentives than do the shareholders.

Instead, activist shareholders-- the type likely to make use of the powers say on pay and its ilk would empower-- have tended to come from a distinct sub-set of institutional investors; namely, union and public employee pension funds.As I have observed elsewhere:

The interests of large and small investors often differ. As management becomes more beholden to the interests of large shareholders, it may become less concerned with the welfare of smaller investors. If the large shareholders with the most influence are unions or state pensions, however, the problem is exacerbated.

...The deficiencies of shareholders as decision makers thus compounds the inherent undesirability of reposing ultimate control of an authority-based organization in the hands of a diffuse electorate rather than a central agency.

Legislation that “fixes” a nonexistent problem by upsetting basic principles of federalism ought to be a nonstarter. Unfortunately, the executive compensation debate has become so thoroughly bollixed up with issues of class warfare and financial populism that rational arguments seem to fall on deaf ears.

Wall Street typpes and their well-paid defenders were still smarting over the passage of Barney Frank's Say on Pay Bill in the House. They claimed, falsely, of course as history has proven that "it would spur public-company CFOs and their bosses to take jobs at private equity-firms, away from the scrutiny of investors.

Frank has sided with shareholders who claim they’ve been wronged by the hefty pay packages given to outgoing executives of poorly performing companies. “Excessive executive pay has been proven to have a significant impact on company’s profits and shareholder returns,” Frank said in a statement.

But critics of Frank’s bill-- many of them Republicans-- say Congress shouldn’t get involved in this issue now because the Securities and Exchange Commission’s rules on executive-compensation disclosure are still relatively new.

Put into effect at the end of last year, the SEC’s rules require companies to provide more information about their top executives’ pay packages in their proxy statements. Not all companies have had to comply yet.

...The legislation also gives shareholders an advisory vote if a company gives a new but undisclosed “golden parachute” while negotiating to buy or sell a company. Such payouts are doled out to executives if they’re terminated following a merger or acquisition.

Then, Illinois' junior senator, Barack Obama, already interested in the presidency, and finding donors to finance his run, took up Frank's bill in the Senate, again, with the non-binding bullshit.

In a speech on Friday, Obama singled out two companies, KB Home and Countrywide Financial, as examples of those that have provided excessive compensation packages. He asked Congress to pass legislation he has sponsored that would require corporations to have a nonbinding vote on executive pay.

The legislation would not, however, permit shareholders to veto a compensation package offered to an executive and would not place limits on pay, the AP notes.

“This isn’t just about expressing outrage,” Obama reportedly said in prepared remarks. “It’s about changing a system where bad behavior is rewarded so that we can hold CEOs accountable, and make sure they’re acting in a way that’s good for their company, good for our economy, and good for America, not just good for themselves.”

Say on Pay proposals have been submitted to nearly 80 companies at this year’s annual meetings, according to RiskMetrics. Such major business groups as the Business Roundtable and U.S. Chamber of Commerce oppose these kinds of measures; however, in a recent survey of technology-company CFOs conducted by BDO Seidman, 61 percent said they think shareholders should be able to vote on executive-compensation plans.

Verizon decided to adopt Say on Pay late last year, and Aflac-- the first company to adopt the policy-- agreed to move up its advisory vote on the issue to this year.

On Thursday Goldman Sachs chief executive Lloyd Blankfein made it clear he opposes the practice. Speaking at the investment bank’s annual meeting, he said shareholder votes on executive pay would constrain directors from exercising judgment and hurt the investment bank’s ability to attract the best employees, according to Reuters. He added that it would “create a feedback loop. It would create a cloud, a constraint, a limitation on decisions that have been at the heart of what a board has done.”

When it came to a floor vote, 9 predictable Blue Dogs voted with the Republicans against Barney's bill on behalf of their Wall Street benefactors. All 9 were either defeated or forced from office in the next election cycle, primarily because of poor turn-out from Democratic base voters, who just stayed home. 4 other even worse Blue Dogs voted for a motion to recommit by Wall Street whore Scott Garrett (R-NJ) which would have killed the proposal outright. With one ugly exception-- Henry Cuellar-- they were all kicked out of Congress by the voters as well. These are the Democratic Wall Street shills who went down fighting against the interests of their constituents:

• Dan Boren (Blue Dog-OK)
• Bobby Bright (Blue Dog-AL)
• Parker Griffith (Blue Dog-AL)
• Ann Kirkjpatrick (New Dem-AZ)
• Frank Kratovil (Blue Dog-MD)
• Betsy Markey (Blue Dog-CO)
• Harry Mitchell (Blue Dog-AZ)
• Glenn Nye (Blue Dog-VA)
• Harry Teague (Blue Dog-NM)
• Henry Cuellar (Blue Dog-TX)
• Walt Minnick (Blue Dog-ID)
• Mike McMahon (Blue Dog-NY), who, we might add, is the DCCC's preferred recruit for the seat he lost then, now that Michael Grimm is resigning next week.

On July 31, 2009, H.R. 3269, the "Corporate and Financial Institution Compensation Fairness Act of 2009" passed the House of Representatives. The House bill included a section that allowed for a Say on Pay for all publicly traded American companies-- and it included the shareholder vote on golden parachutes. The Senate's companion bill was Schumer's misleadingly-named Shareholder Bill of Rights. The House and Senate bills were reconciled in a final bill that was signed by President Obama on July 21, 2010 called The Dodd–Frank Wall Street Reform and Consumer Protection Act.

In 2012, only 2.6% of companies which voted on Say on Pay measures failed to pass them. But is the legislation working? Alyce Lomax made the case in April that it's mixed bag. "For years," she wrote, "CEO pay rose largely unchecked in America. Although leaders who build great companies deserve pay commensurate to their accomplishments, too many underperforming or lackluster CEOs make astronomical amounts of money at shareholders' expense. It's odd that one class of workers tends to make millions-- often without a performance review. Dodd-Frank made say-on-pay votes mandatory, giving shareholders a chance to vote "yea" or "nay" on the CEO compensation policies at the companies they own. Shareholders are increasingly not only aware of their proxy ballots, but also marking them, occasionally voting overwhelmingly against outsized pay and other corporate policies. Although these votes are always nonbinding, shareholder activism and several years of vote results may be giving boards of directors a bit of a reality check from owners of public companies. Maybe the message is starting to get through."

The Wall Street Journal recently reported data from a Hay Group survey of proxy statements filed from May 2013 through the end of January. Overall, median CEO pay increased by 4.1% in 2013. One particular point of interest, given the way CEO pay usually works, is that the increase actually paled in comparison to the median returns those companies' shareholders enjoyed-- a whopping 25% at the companies surveyed.

CEO compensation overall has increased rapidly for years, even in times when the overall economy and corporate performance faltered. CEOs enjoyed one of the first major "recoveries" in a stunted economy, even as many Americans received pink slips or filed for unemployment.

According to the AFL-CIO's annual account of CEO-to-worker pay ratios, in 2012 that ratio reached 354 to 1. In 1982, the ratio was a mere 42 to 1.

On the other hand, The Wall Street Journal also reported separately that so far this proxy season, more shareholders have been supporting pay packages. Towers Watson has performed an early survey of 170 Russell 3000 companies showing that an average of 93% support for pay policies compared to 90% last year.

Further, the Journal reported that even proxy advisory firms seem to be standing down a bit, with Institutional Shareholder Services having recommended that only 4% of companies get a thumbs-down on CEO pay, compared to 14% last year.

Perhaps several years of high-profile pressure have made some corporate boards try harder to tie compensation to performance.


Overall, CEO pay is still in the stratosphere, but the increased focus on the fairness of executive pay is a step in the right direction. Cutting CEO pay after difficult years is a sensible policy right off the bat, as is avoiding shareholder ire by rethinking pay policies.


...Investors often come down on opposite sides of this issue, which is understandable. Rewarding leaders who do great work is hardly irrational. What's irrational is the widespread failure to make sure CEOs actually earn millions upon millions of dollars. Rewarding CEOs for underachievement gives them little incentive to excel, and this backward logic has prevailed for too long... So far this year, though, there seems to be a relative shortage of drama and only a few pay decreases.