Boomers, Markets & Money

A Down-to-Earth Discussion of Financial and Lifestyle Information for Baby Boomers

How to Fudge Statistics: Lessons from CEO Salaries

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Some points in AAII’s article “Questioning High Approval Rates for Executive Compensation” were amusing.

The article summarized some of the points of Towers Watson’s October 2012 “Getting Pay for Performance Right: Executive Compensation Flash Survey Findings”.Dollar Sign

Points from the AAII Article:

  • The Dodd-Frank Act requires that shareholders vote approval of CEO pay at least every three years—unfortunately, the votes are non-binding. What’s the point of that?
  • The Tower Watson survey found that stockholders voted yes for most compensation proposals. Ninety percent of companies reported that executive pay packages received seventy-one percent or greater approval ratings by shareholders.
  • However, 81% of companies surveyed said they defined the peer group they were compared against. Or as AAII put it “compensation committees are handpicking the companies to measure pay against.” Do you get to pick the person’s salary that you are compared to?
  • Only about 38% of companies considered discussions with stockholders, who actually own the firm! Company boards and compensation committees influenced decisions in 77% of cases.

Compensation Conflict

The situation boils down to a topic covered in every introductory corporate finance class—the agency problem. BusinessDictionary.com defines an agency problem as “A conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead.”

CEOs and upper level executives are only employees of shareholders. However, minority shareholders don’t have voting control of the firm and usually don’t have the resources to organize to protect their interests. Hence, we see some outrageous pay packages. In my opinion, this money should be turned over to shareholders in the form of dividends or reinvested in the company to create real long-term value.

What is Your Opinion On High-Level Executive Compensation?

Please leave a comment on your thoughts on this issue. Any suggestions for improvements in the compensation process are most welcome.

Resources:

Questioning High Approval Rates for Executive Compensation” AAII Journal December 2012

Tower Watson Executive Pay Bulletin November 8, 2012

America’s Highest Paid CEOs”apr Forbes, April 2012

Author: financeboomer

Boomers, Markets & Money is a down-to-earth discussion of financial and lifestyle information

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