Rules Can't Stop Executive Greed
By Daniel Akst
New York Times
Sunday, March 5, 2006
In the arena of executive compensation, two recent
developments stand out against the backdrop of continuing
looting. First, the Securities and Exchange Commission
announced plans to make corporations more fully disclose
executive pay. Second, a study by Mercer Human Resource
Consulting found that more companies were imposing
performance targets on the stock and options they granted to
To the uninitiated, these events may suggest that some
moderation is in the offing, but ultimately neither will
help much. Any benefit from shining the cleansing light of
day on executive greed will probably be outweighed by the
inflationary effect of additional disclosure, which will
provide more ammunition for executives and consultants
seeking to justify additional increases. They have to keep
up with the Joneses, they'll say.
Tying pay more firmly to performance won't help, either.
Boards will find ways around the requirements if performance
isn't up to snuff, and they will continue to bid
irrationally for unduly coveted executives.
As Rakesh Khurana showed in his insightful book, "Searching
for a Corporate Savior: The Irrational Quest for
Charismatic C.E.O.'s" (Princeton University Press, 2002),
there is a much wider pool of potential chief executives
than soaring pay levels would seem to imply. But companies
insist on bidding for a savior, not a capable leader who
knows the business at hand, which may be why typical C.E.O.
tenures are now so short. Even in the boardroom, charisma
carries you only so far.
Indeed, linking pay to stock prices is liable to do more
harm than good. A stock price isn't much of a measure of
executive performance, anyway. A huge part of that price
reflects industry conditions; energy companies soared not
because they were run by paragons of diligence or insight,
but because of world events beyond any executive's control.
In hard times, moreover, a company's stock may take a hit,
but those are precisely the times when good leadership is
most difficult and valuable.
Other performance metrics can be equally troublesome,
encouraging executives to massage earnings, sacrifice
long-term strength for higher short-term sales and profits
and otherwise act in ways detrimental to everyone but the
C.E.O., his family and a few lucky divorce lawyers.
Perverse incentives notwithstanding, this focus on metrics
is a sad acknowledgment by corporate directors that they
cannot control themselves or the pay they hand over to their
top five executives. In one study, two professors, Lucian
A. Bebchuk of Harvard and Yaniv Grinstein of Cornell, found
that from 2001 to 2003, such pay totaled roughly 10 percent
of corporate profits at public companies. It's a bizarre
twist on the tradition of tithing, one that benefits the
rich instead of the needy and conscripts America's
shareholders as involuntary donors.
Although more disclosure and pay-for-performance
requirements won't dampen runaway C.E.O. compensation, both
are useful for illustrating a larger lesson: that it's
naοve to place too much faith in the power of rules to limit
human behavior. Indeed, the problem of C.E.O. compensation
suggests that, as in many aspects of modern life, few
mechanisms of constraint are as effective as one on which we
relied so often in the past. That mechanism was shame.
You'd think that more disclosure would produce more shame,
and thus less pay, for C.E.O.'s and other top executives.
Unfortunately, disclosure of a few more million here and
there won't fundamentally change a hiring system that
actively recruits the most grasping and hubristic
candidates. Consider the incentives: by offering lavish
pay and perks that would make royalty blush, corporate
directors today are perhaps unwittingly selecting C.E.O.'s
for shamelessness and egotism rather than leadership.
History teaches that there is no ultimate solution to the
so-called agency problem, or the tendency of those who
merely work in an enterprise to act in their own interest
rather than that of the owners. Rules and incentives can
help, of course, but they cannot take the place of an honest
sense of obligation, duty and loyalty values that ought to
run in all directions in any decent corporate culture.
This web of mutual obligation is an invisible social safety
net a form of corporate social capital which we've
unfortunately allowed to fray. Rapidly rising income
inequality is a sign of the resulting imbalance.
Corporate chieftains may continue to enjoy unearned bounty,
but they should not be surprised if someday they and the
hapless investors who employ them reap the same brand of
cynicism they are sowing. If that happens, we'll all be
poorer for it.
Daniel Akst is a
journalist and novelist who writes often about business.