Public Comment

I just finished reading a stock proxy. Like most proxies, it has a section on compensation for its five named executive officers. Also, not atypically, this section was a full third the length of the full proxy, in this case despite the fact that there were two appendices with a restatement of the articles of incorporation. What is particularly relevant to current events in this proxy, was that the compensation section, like all such sections I have read, had no discussion of how executive compensation compares to the compensation of any of the other employees of the company. In the corporate pay structure there is no connection between executive compensation, and worker compensation.

It gets worse. Worker compensation is a cost, and a well-run business does what it can to limit this cost. This includes automation, outsourcing, temporary or part-time employment without benefits, layoffs, and even efforts to eliminate minimum wage laws. On the other hand, the compensation philosophy espoused in proxies almost guarantees pressure to increase executive pay. Companies present themselves as being in competition to attract and hold scarce executive talent. Every compensation section I have read has an extensive discussion of the pay in comparable companies. To ensure company success, target compensation for their executives is almost always at or above the median of their competitive group. At or above, that is the rub. All companies cannot be at or above the median, at least not all the time. A company can, however, raise its pay to the median or above at a particular time. It will then be at or above the median until its competitors raise their executive pay so that they are at or above the median. 

There is, of course, some variability in the year-to-year pay. A company may not meet its targets, with the result that actual pay for the year will be lower. A company could also set set extremely high performance targets, but then the bonuses and options would not be perceived as a real incentive, and the company risks losing, their supposedly scarce executive talent. Instead, performance targets get adjusted to meet the economic conditions, with the result that the target pay shows an ever increasing trend upward. 

The bottom line is that worker and executive pay will increasingly diverge, unless changes are made in the structure of the compensation process. Currently, the public, and even most stock holders, have little leverage to accomplish changes. Companies currently provide a "say on pay" resolution to the stockholders, but this is just a yes or no vote. Even if people vote no, it is just an advisory vote, so the company does not have to respond. In addition the vote does not provide the company any information on whether the stockholder thinks the pay is too high or too low, or whether the objection is to the process - not just for the current year, but in general. Stockholders can also vote against the directors on the compensation committee, but again this does not provide specific information regarding the stockholder's concerns. In addition, a company does not have to respond to a vote unless it is a majority vote, and in general individual small stockholders represent a minority of most stock ownership. 

Companies are not going to want to change their compensation structure as long as they believe that they are in competition for scarce executive talent, and are in a buyer's market for workers. Although there is evidence that this belief is incorrect, it is likely that many directors would feel that they might face stockholder ire, and possibly even legal action, if they took such action and they lost top management and, no matter what the reason, had a downturn in company profits. The alternative is that structural changes have to be imposed by a vote of the majority of the shareholders, or by regulation.  

Shareholders resolutions are either resolved by discussion with management, or are put to vote by the shareholders as a whole. The process takes an investment of time and sometimes money, and is therefore often carried out by social or religious groups. People who are not shareholders cannot vote or submit resolutions, however many shares are held by money market and retirement funds. Pressure on these groups provides an alternative method to affect compensation for those who do not directly own stock in a given company. In addition, since these groups own significant fractions of a company's stock, there is a higher likelihood of a resolution being accepted if these groups are on board. 

It is unlikely that laws can directly limit run-away executive compensation, but it can force disclosure or tax excess compensation. Perhaps a more effective tack here is to note that organizations such as the University of California are essentially public bodies, and thus can be influenced by public pressure. The University of California has the potential to have significant leverage on executive compensation through its retirement fund, as well as by reining in the excess salaries of its own administration. 

Occupy Wall Street, and its progeny, have finally brought the issues forth. Now it is time to start putting the actions in place to reverse the increasing disparity between the rich and poor. I suggest that proxy resolutions and direct public pressure to reform the compensation model and structure are two such actions. 

Robert Clear