Sanity coming to executive compensation

Congress and regulators are alerting investors that executive compensation may be out of hand.

As the kids in my neighborhood would say as they roll their eyes at a clueless adult, “Duh!”

It has taken a financial crisis of monumental proportions to focus Washington’s attention on a problem apparent to Americans from coast to coast: Executive pay has severed all ties to sanity. Now, the Securities and Exchange Commission has said that all big businesses, not just those in the financial sector, should consider limiting compensation packages that reward excessive risk-taking by executives.

What has taken Washington so long to see that this was a problem?

In the wake of the taxpayer bailout of Wall Street firms, members of Congress, with their chests all puffed out, recently singled out and grilled a number of the financial company chief executives. While the show trials of the top executives who played pivotal roles in this financial collapse were mildly entertaining, they didn’t really touch on the hundreds of other public-company CEOs whose compensation is out of control.

Next year, the SEC will examine the filings of the largest U.S. financial institutions to review disclosures about executive pay as well as traditional corporate disclosures. That is obviously a step in the right direction.

The increased review will include the 24 financial companies that have agreed to participate in the Department of the Treasury’s equity-injection program, under which taxpayer money will be used to buy stakes in the companies.

Under the terms of the Treasury Department’s assistance program, financial companies that receive equity injections are prohibited from structuring compensation plans that “encourage unnecessary and excessive risks.”

The SEC has stressed that all compensation committees, when setting performance targets, should consider “the particular risks an executive might be incentivized to take to meet the compensation target.” Democratic lawmakers have pushed for curbs on executive pay, and they must continue to press the issue next year.

Meanwhile, several regulators around the world have conducted investigations and concluded that lucrative pay packages helped fuel aggressive risk-taking by financial executives. In Australia and the United Kingdom, for example, regulators are now working to restrict compensation across all companies, including those that aren’t receiving a government bailout.

Fixing excessive CEO compensation isn’t rocket science. It is just a matter of adjusting the ratio of executive compensation to the pay of the average working stiff.

The mind-boggling numbers speak for themselves. In 1980, that ratio was 40-to-1.

Today it is 300-to-1. Are companies today really managed almost eight-times better than they were in 1980?

You know the answer to that question: Duh!

It took a financial disaster for Washington to take notice of the kleptocrats sitting on the CEO throne at many companies. Their runaway greed and unbridled love of privilege, which has run amok since the 1980s, seems immune to criticism, public censure or — heaven forbid — any personal sense of decency or ethics.

For many chief executives, apparently, too much is never enough, and now we are all paying the price as we watch our retirement portfolios shrink.

But from all negative situations comes a positive. And in the case of this financial collapse, the American investor now can demand a comprehensive law to reform and regulate rampant corporate excess.

This includes grossly inflated CEO salaries, ridiculously generous bonuses and platinum (forget golden) parachute packages that all too often are paid to managers whose performance is mediocre at best.

Fortunately, the country will see its way through this mess and America will be better off with the many reforms that are likely on the way.

Jim Pavia is the editor of InvestmentNews.