Give shareholders a voice on CEO pay

Marketplace Staff Mar 6, 2007
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Give shareholders a voice on CEO pay

Marketplace Staff Mar 6, 2007
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KAI RYSSDAL: Here’s a tale of two CEOs. Both of them effectively fired, or at least eased out the door.

John Browne’s the outgoing CEO of the British oil giant BP. The company announced today Browne’s total compensation package last year was 28 percent lower than a year earlier. BP’s profits rose with higher oil prices. But ongoing safety and ethical problems have kept BP in regulatory cross-hairs.

Now, consider Bob Nardelli, former CEO of the American company Home Depot. He was asked to leave recently, and given a $210 million going-away present. Commentator Nell Minow explains why the difference matters.


NELL MINOW: Excessive CEO compensation is not just an immaterial aberration to be written off as a tiny percentage of a company’s balance sheet. It’s a fundamental, systemic abuse that undermines the credibility of our capital markets.

So the people we count on to provide us with capital through investments and loans will be less likely to want to give us their money. That means we’ll have to offer more guarantees or more goods in exchange for their money. That increases the cost of capital and it makes everything more expensive.

And if capital becomes too dear, then we’ll lose critical investors to other economies that tie pay to performance.

The fundamental irony is that the very same people who claim that the free market is the most efficient mechanism for assigning value don’t apply that test to their own pay packages.

We should give shareholders an advisory vote. That would strike just the right balance.

It’s not the job of the shareholders to decide on the details of CEO pay. That requires a deep understanding of each company’s strategy and risk factors. That’s what the board is for. But shareholders could remind the board that it owes its loyalty to them, not the CEO.

The U.K. adopted this rule four years ago. And you know what? The world didn’t come to an end.

There has been exactly one vote against a pay plan. The board revised the plan.

It turns out that just the prospect of a “no” vote discourages excessive pay plans at many companies and leads to better communication on why any given pay plan isn’t excessive. That’s exactly how it should work.

Shareholders want executives to earn a lot of money. They just don’t want them to get a lot of money without earning it.

RYSSDAL: Nell Minow is the co-founder of The Corporate Library.

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