Corporate Bonuses: Can Government Rein them in?

In the eyes of shareholders this law makes it much easier to detect the so-called run-away CEO.

Zack Larmand, Staff Writer

via governancefocus.blogspot.com

Adaptable and dynamic leadership can propel organizations past the barriers of government legislation and market forces. Nonetheless, some are of the opinion that leading executives are more deserving of their high pay than others. Google reshaped the way we look at the internet, and their outstanding cast of well paid executives suggests that perhaps there is some justice in their excessive wages and bonuses.

A Federal statute signed by President Obama in 2010, dubbed the Dodd-Frank Wall Street Reform and Consumer Protection Act, is meant to promote financial stability. Within this act there is a ’say-on-pay’ vote in which case shareholders can vote against high pay for executives as well as section 953(b), which aims to add transparency to pay disparities.

But really, what is the price tag on such dynamic executive leadership?

The American Federation of Labor – Congress of Industrial Organizations or AFL-CIO – produced an executive pay watch for 2011 that features a list of the 100 highest paid CEO’s. The bottom of this list has Robert J. Coury of Mylan Inc. with total compensation of $16,481,387 for 2009.

The top is championed by Gregory B. Maffei of Liberty Media Corp. with a stunning $87,493,565 earned in the same year. Viacom Inc’s Phillippe P. Dauman is listed at almost $85 million, just over Ray. R. Irani of Occidental Petroleum Corp who earned over $75 million in 2010.

[pullquote]Dynamic leadership is a scarce skill, so when leaders demonstrate strong performance perhaps their rewards are deserved. [/pullquote]

Total Compensation recognizes more than just base salary. In fact, according to AFL-CIO, the Chairman and CEO of Occidental Petroleum Ray R. Irani has a 2010 base salary of just fewer than $1.2 million dollars. Most of his total compensation is received from an over $40 million dollar stock award and a non-equity incentive plan worth over $31.5 million. Having received over $850 million dollars over the past decade, some would argue, eliminates most disputes that certain executives are still getting paid far too much.

The “say-on-pay” element of the new Dodd-Frank Wall Street Reform and Consumer Protection Act is meant to promote financial viability. The shareholders are allowed to vote against high pay for executives. This vote nonetheless acts as a pressure point to influencing the board of directors, which makes any and all final decisions regarding executive pay. The “say-on-pay” vote may not give shareholders a direct hand in lowering executive compensation but the pressure it will create is likely to be influential.

Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies to disclose the CEO to Worker pay for their average employee. Aiming to address workplace inequality, this law will help workers know where they stand within their organization. In the eyes of shareholders this law makes it much easier to detect the so-called run-away CEO.

As of January 1, 2011 Google raised the wages for its executives. Four executives will receive a significant 30-percent increase in their respective base salaries, bringing their new annual base salaries to $650,000. Both Patrick Pichette and Nikesh Arora will each receive an additional $20 million in options; Alan Eustace will receive $10 million; and Jonathan Rosenberg will receive $5 million.

Justifying such high wages is very hard to do. Google is a company looking for high caliber and innovative performance. Total compensation equates to total rewards and in most cases more sought-after rewards attract more scarce skills. Google requires dynamic leadership.

But dynamic leadership is a scarce skill, so when leaders demonstrate strong performance perhaps their rewards are deserved. Nevertheless, pay disparity contributes to an ever growing gap between the rich and the poor. Therefore, laws meant to add transparency and voice may help distinguish CEO’s who are deserving of their high pay from those who are not.

ARB Team
Arbitrage Magazine
Business News with BITE

Liked this post? Why not buy the ARB team a beer? Just click an ad or donate below (thank you!)

Liked this article? Hated it? Comment below and share your opinions with other ARB readers