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CEO and other executive compensation is obscene July 20, 2009

Posted by fetzthechemist in Uncategorized.

We constantly hear of the heads of companies making tens or hundreds of millions of dollars, even in years where their companies perform poorly. Executive compensation is the epitome of the old-boys network. Outside members on the boards of directors are selected to be part of an executive compensation commitee. This is justified as being a neutral group that will be fair in granting compensation. But these outside members are a huge network of cronies, sitting on each others’ boards. Decisions on compensation are based on “suggestions” by selected compensation experts and consultants. These people know their roles and get paid well for their efforts – also knowing that if they do not get the desired results that they will no longer be asked to serve a few days at tens of thousands of dollars.

So, salaries are inflated. If there is grousing about this from stockholders, then the salaries are a “modest” few millions and the executive regularly get performance bonuses of much more millions regardless of performance.

The current reform movement is to have more input from shareholders. This will look good, but do nothing. Most companies own some (usually a lot) of their own stock. Additionally, any stock in employee profit-sharing or other employee benefit programs has a default voting option. The employee must vote or the stock automatically defaults to the voting control being that of the board of directors. Most employees in large corporations do not take the time to vote, so the board controls another huge block of votes. Controlling large blocks of shares means dissent is symbolic. The board can still approve the “independent” recommendations for high pay that the board gets.

Other, less noticed, proposals hit harder at the corporations. They limit executive compensation from being a business expense that can be written off as a tax deduction. Some require that executive compensation be accounted for directly off of the amount of corporate profit, the larger the compensation for executives, the lower the profit the corporation reports. Changes of this sort have more chances of change. US companies are less competitive than those in countries where executive pay is more controlled and constrained (Japan, Korea, China, India are all examples). It is common in the US for a CEO to make more than a thousand times the average of workers in the corporation.



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