Congress pecks away at CEO pay

Legislation would give shareholders a formal say in executives' compensation packages.

from the April 30, 2007 edition

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Addressing business leaders on Wall Street in February, President Bush said, "The salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders."

There's no correlation between CEO pay levels and corporate performance, charges Mr. Frank, a Newton, Mass., representative.

Frank's bill passed by a 269 to 134 majority, with the support of 40 Repub­licans. It requires that shareholders (the owners of public corporations) be allowed to vote every year in an advisory capacity on compensation packages.

If, in the future, the compensation committees of boards that set CEO pay levels tend to ignore the objections of many shareholders to high executive pay packages, "then we will do something more," Frank warns.

Frank's "say on pay" bill was quickly introduced in the Senate by Sen. Barack Obama of Illinois, a candidate for the Democratic presidential nomination. The move suggests that the high level of income inequality in the United States could be a "major" issue in the 2008 election, says Patrick McGurn, special counsel of Institutional Shareholder Services (ISS), experts on corporate governance.

Democrats hold a 51-to-49 majority in the Senate, so prospects of passage for the bill are good. But it could face a presidential veto. Mr. Bush told his Wall Street listeners that the government shouldn't interfere in corporate governance.

Executive pay is no longer a simple matter of envy. It has "macroeconomic" consequences, according to a study by Lucian Beb­chuk of Harvard Law School and Yaniv Grinstein of Cornell University. They found that the aggregate compensation paid to the top five executives in US public companies had reached 10 percent of profits, roughly $350 billion, in 2003 – twice the 5 percent level of 1993. "This issue is not merely symbolic but rather of practical significance," Professor Bebchuk testified to Frank's committee.

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