Too bad shareholders aren’t pay czars

Marketplace Staff Nov 2, 2009
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Too bad shareholders aren’t pay czars

Marketplace Staff Nov 2, 2009
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TEXT OF COMMENTARY

KAI RYSSDAL: There are, very broadly speaking, two schools of thought on those rich pay packages a lot of Wall Streeters get. Either people are really mad that they even exist, or they’re angry about the government’s decision to limit them.

Commentator and economist Susan Lee thinks the anger on both sides is misplaced.


SUSAN LEE: OK, I get it that people are upset about the government’s pay czar setting compensation. But I also get it that there’s a pretty good reason for it.

These companies, after all, took government bailout money. That gave the government an ownership stake, and owners have a right to determine pay.

Now, this all seems like a no-brainer, until we consider the ultimate owners of these companies: the shareholders. Do shareholders have the right to set executive compensation? Well, no. Absolutely not.

Worse, shareholder-owners don’t have the power to set pay at companies who haven’t taken bailouts.

Here’s how it works:

The power to set compensation is in the hands of the company’s board of directors. And a majority of these boards, at a majority of American corporations, is made up of friends of the CEO or other CEOs.

Because there’s honor among thieves, it’s very unusual for directors to rein in huge pay packages — especially since the money doesn’t come out of their own pockets.

Now, Congress has tried from time to time to remedy this lopsided balance of power. Recently, the House passed a bill requiring boards to hold a shareholder vote on executive comp. But the vote would just be advisory. It wouldn’t be binding. And so boards would be free to ignore it.

And that’s actually what happened in the U.K. last year. A majority of shareholders voted against the pay packages at Royal Dutch Shell. But the board awarded the money anyway.

So, if you want to enjoy some righteous anger, then I suggest you focus on the inability of shareholder-owners to determine pay. It’s part of why we’re stuck with so many overpaid, under-competent corporate chieftans.

RYSSDAL: Susan Lee is an economist in New York City.

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