Corporate Governance

CEO Pay: Legislation Not a Solution

By Sandeep Gopalan

Last week's congressional hearings on CEO pay are just another manifestation of a deep schism in fundamental values over the acceptability of greed. The dispute is less about shareholder interests and much more about whether it is appropriate that some people make staggering amounts of money when their contributions are difficult to quantify. As Rep. Waxman noted in his opening statement "The CEOs of the 500 largest American companies received an average of $15 million each in 2006 - a 38% raise in just one year. In 1980, CEOs were paid 40 times the average worker. Today they are paid 600 times more. ... l0% of corporate profits are now flowing to the top executives."

Statistics like these are routinely trotted out by those in favour of regulatory solutions to protect shareholder interests. Yet, if it is shareholder interests that are truly at issue why is there so little scrutiny directed at the members of the board who approved compensation and severence packages? There is also inadequate attention devoted to the role of large shareholders who can use existing mechanisms to control egregious pay. There is evidence that the size of pay and severence packages can be kept in check if large institutional shareholders are engaged in corporate governance matters - like they are in the U.K.

In the first of three articles examining the various aspects of the excessive pay puzzle, I argue that social sanctions are preferable to any legal solutions. The paper can be downloadedhere. 

Full post as published by The Race to the Bottom on March 13, 2008 (boomark / email).