In the Boardroom, Every Back Gets Scratched

New York Times

According to the Congressional Research Service, average pay for chief executives stood at 179 times average worker pay in 2005, up from a multiple of 90 in 1994. Adjusted for inflation, average worker pay rose by a total of only 8 percent from 1995 to 2005; median pay for chief executives at the 350 largest companies rose 150 percent.


Top executives’ pay as a ratio of their employers’ earnings has also skyrocketed in the last 15 years. And these executives are paid far more than their counterparts at companies of comparable size in Britain or Japan. How did this happen? How did pay grow so fast at the top?


It starts with several corporate governance factors and then goes into psychosocial factors. For one thing, although a company’s stockholders by every legal precept own the company, they have almost no say in how their employees, the executives, are paid. Instead, the pay of the top executives is set by the board, usually the compensation committee. The directors are elected by the stockholders via proxies — those things you get in the mail and then throw away. Thus, in effect, the board is selected by top management, usually by the C.E.O. himself. Once a director is on the board, there is only the slightest of chances that he will leave, except for death or old age or illness.


To be a member of the board of a large company is a little example of paradise. You get good pay for just sitting in a meeting and listening to summary presentations. You get insurance and a pension. You can go to luxurious resorts and play golf. What the heck are security lines? You fly in private jets. Sometimes, you get stock options, and these can be meaningful.


In other words, it’s nice to be the director of a public company. How do you keep your job? You are really nice to the person who put you in that job. You don’t know the little stockholder in Muncie who might have 500 shares. But you do know the guy who repeatedly reappoints you for your post at the directors’ table. The little stockholder cannot do a thing for you, but the boss can.


When it comes to compensation, you want him to be really happy. It doesn’t matter how well he’s doing, unless he’s wreaking havoc and you may be sued. It doesn’t matter if the stock price has languished. You want what’s best for No. 1, and that means what’s best for Mr. Big. You hire a compensation consultant to work out pay and options and deferred pay and retirement and every other good thing for Mr. Big. The compensation committee knows that its hiring and rehiring are dependent on Mr. Big’s being happy. So it crafts a package that will keep him happy — and throws in a few goodies for the directors.


It’s called the “boardroom buddy system,” and it works perfectly once you are on the inside. You just have to make sure you stay on the inside. And to do that, you don’t upset the apple cart with tacky questions about what the C.E.O. is doing or why he is paid so much.


Let’s look at some recent real-world tales of executive pay. My old pals at Goldman Sachs are paid so much that over 40 percent of the firm’s net revenue went to compensation and benefits last year, according to its latest 10-K. Goldman’s chief, Lloyd C. Blankfein, was paid $54 million last year. To be sure, the firm did well in 2007, but the stock has been tanking. It’s now at $175.40, down from $250.70 on Oct. 31.


Similarly, Stephen A. Schwarzman of Blackstone, which has lost about 40 percent of its value in the past six months, got more than $350 million. This is a company that has been a nightmare for investors since its debut last year as a public company. Pay at this level is art. (Blackstone wasn’t included in Equilar’s compensation survey because its revenues were below $6.5 billion.)


The amazing fact is that as the economy goes through challenges, as the stockholders and workers fume, the executives can basically set their own pay. Once the board has acted, according to a legal doctrine known as “the business judgment rule,” hardly anyone can challenge its actions. If it gets that compensation consulting firm to approve what it did, or if it comes from the compensation firm first, the pay is set in stone — except for the next time the board wants to raise it.


[..]Now we come to a sad fact about modern American life. It was brought up by the Rev. Dr. Martin Luther King Jr., who often said that America, through its technology, has made of itself a neighborhood, but not a brotherhood. It is a lot worse now. The nation has become, to some at the top, far more of a looting opportunity than a family.


I am not sure where this has come from — maybe from media that glamorize wealth and high-end consumption, maybe from poor moral training. But one thing is clear: Current law does not give shareholders or regulators any tools to rein in executive greed. There simply is no legal “cause of action” for pay packages that, however obscene, are approved by the board and disclosed to shareholders. Congress could change this. So could the Securities and Exchange Commission.