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April 19, 2014

Most nearly everyone is familiar with the old saw that “Everybody talks about the weather, but nobody does anything about it.” That holds true with executive compensation as well. We all talk about the outrageous compensation paid corporate executives these days but do nothing about it. We should; we are paying for it. I have been as guilty and negligent as the next person in this connection. I think it is time to not merely complain but to do something to end this ridiculous overpayment of compensation to CEOs and other high executives in the pecking order of our corporate world. After some research, I was struck with the loss of democracy within corporate governance, hence this essay.
First we must identify the evils we propose to correct. The primary evil to be addressed is not the mere overpayment of compensation to corporate management – that is the result of the evils that are practiced – and if we can correct such practices we will be able to rein in such gross overpayments to corporate executives. If, in short, we can end or amend the system that allows such atrocities to occur, then we will have solved our problem (and that of shareholders of the corporations so afflicted).
CEOs these days make too much money while ignoring the profitability of their companies and, of course, workers’ pay, but in fact these executives are corporate employees, just as are their workers. The owners of the corporation (shareholders) should determine their company’s executive pay and perks. However, private stockholders own just 34 percent of U.S. stock. The majority of corporate stock in America is owned by mutual, pension, retirement, hedge and insurance funds per a 2013 report of the U.S. Federal Reserve Board. Such fund managers have cozy relationships with top executives, which explains in part why such executives are overcompensated; but even that is not the fundamental problem. The problem is one of corporate governance, i.e., that the managers of these funds vote the stock in favor of such outrageous compensation WHEN THEY DON’T OWN THE STOCK. The stock belongs to the shareholders of the corporation. Non-owning managers should not vote the stock; the owners of the stock should vote the stock. The stock, after all, belongs to the people who paid for it and whose investment is at risk, not the managers. Managers merely hold the stock; they don’t own it.
It’s about time that the people who own the company have some say in running it. After all, it’s their money at stake with their stock ownership. Managers have nothing at risk but still vote the stock. Ridiculous over-compensation of corporate executives reduces company profitability and the potential for shareholder dividends and is a guarantee for depressed stock values, all risks borne by shareholders and neither the company’s executives nor that of managers of funds who vote their stock.
Germany and others have laws limiting how much corporate executives may be paid in statutory ratios such as 8 to 1 of the average wage of employees of the particular corporation. That is one solution, but I don’t think it necessary here. We can handle the over-compensation problem in a more democratic fashion. All we need do is pass laws and amend regulations which effectively end voting by managers of stock they don’t own and returning such a right to those who should have had such rights all along, the owners – shareholders. With the democratic return of the right to set executive compensation by a vote of shareholders, we can reasonably expect that they will demand that their executives’ rate of pay will have to relate to their company’s profit, growth etc.
With such democratic governance, whatever they want to pay as owners is their business. GERALD   E


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