More than at any time in a decade, official Washington is focused on how to curb the gilded pay packages of corporate executives. The problem: It's not easy to legislate a pay cut for some of America's most powerful people.
It's clear that the issue has gained traction this month, thanks to public concern about income inequality, investor outrage over pay at companies such as The Home Depot, and the politics of a new Democratic Congress.
The recent signs include:
•As part of a minimum-wage hike under consideration in the US Senate, new taxes would be imposed on one important form of executive pay.
•Rep. Barney Frank (D) of Massachusetts, who chairs the House Financial Services Committee, plans to introduce a bill to require public companies to put their executive compensation plans before shareholders for an annual vote.
•On Wednesday, President Bush used a podium on Wall Street to admonish corporate boards. "You need to pay attention," to see that top-level pay is tied to good performance, he said.
But this doesn't mean action regarding CEO pay will be easy or effective.
"It's going to be extremely difficult to limit in any manner or form," says Howard Silverblatt, an analyst at Standard & Poor's in New York.
The last time Congress tried, the effort backfired. A $1 million cap on salaries enacted in 1993 helped fuel a surge in non-salary pay – namely stock options – pushing total compensation for CEOs toward a record as the stock market peaked in 2000.
And some experts see evidence that disclosure rules, intended to empower corporate directors and shareholder watchdogs, tend to push pay up, as executives look over their shoulders and expect rewards similar to their peers.
This doesn't mean federal laws can't ever restrain executive compensation. But to many experts, the constituencies in the best position to hold pay in check are investors – who have the most to gain or lose from poor pay practices.
"Our preference is that shareholders should be given real power to control boards," which set executive pay, says Richard Ferlauto, director of pension policy for the American Federation of State, County and Municipal Employees.
This labor union, using its clout as the investor of large pension assets, is part of an investor coalition pushing for shareholders to get a "say on pay." The group is seeking to achieve this company by company, starting with votes this spring at the annual meetings of about 50 corporations.
The problem, says Mr. Ferlauto and other critics of current pay packages, is that the directors who set pay for executives aren't as vigilant as they should be on behalf of shareholder interests.
The answer, he says, is to give shareholders an annual chance to approve pay plans – even if it's a nonbinding "advisory" vote – and to allow shareholders to nominate their own candidates to serve on the boards of directors. "Lacking that, I think the only alternative would be a legislative approach," Ferlauto says.
Among those who study corporate governance, some don't see the system in crisis. Some say boards have grown much more vigilant since the collapse of Enron Corp. and the resulting reforms imposed by the Sarbanes-Oxley law.
At the same time, concern has deepened in the past few years.
In one survey of 55 large institutional investors, managing $800 billion in assets, 90 percent said the current system overpays executives, and a similar number said the pay practices are hurting corporate America's image, according to the human resource firm Watson Wyatt Worldwide.
For their part, some directors may feel unable to change the pay system too much without more nudging from shareholders. In a recent survey of 1,300 board members by PricewaterhouseCoopers and the Corporate Board Member magazine, 50 percent of directors said board leadership flows from management – from a CEO who is also board chairman. That's despite the fact that it's the board's job to hire, set pay, and if needed fire the CEO.
Board members acknowledged they are having trouble curbing executive pay, but are counting on shareholders to lead the charge to pare it back, the survey found, according to an Associated Press report this week.
The latest poster child for corporate excess has been Robert Nardelli, who recently departed as chief executive officer of Home Depot with a $210 million "goodbye." Only a portion of that huge sum was actual severance pay, but he took large amounts in stock options and deferred pension compensation.
Such deferred pay is the target of a provision in a minimum-wage increase now being considered in the Senate. Many senators want the boost for low-wage workers to include tax breaks for businesses, who will bear higher labor costs. To pay for those tax cuts in the federal budget, the bill would impose a new tax on deferred compensation above $1 million.
It's unclear if the tax cuts, and that provision, will remain when the House and Senate bills are reconciled.
And beyond that, even at a time of rising concern about income inequality, it's not clear whether further legislation on CEO pay will pass. Given the clout of corporations and the tight balance of power between Republicans and Democrats in the US Senate, legislation such as Representative Frank's appears to have a tough hill to climb.
But some observers say efforts to limit the deductibility of CEO pay could gain ground. "If [voters] knew that we are actually providing tax subsidies to people who are making many millions of dollars a year, they would certainly question it," says Ross Eisenbrey of the liberal Economic Policy Institute in Washington. "It would be politically popular if it were explained to the public."