October 23, 2006
The main reason top executive pay and perks has grown is the inability of the board of directors to reign in these salaries and maintain independence from these top officers. On many firms, the CEO is also the chairman of the board. This is like having the fox guard the hen house – inadequate checks and balances. The CEO also has direct control over a firms assets and some CEOs had effectively bought off directors by providing them individually with special perks or monetary benefits such as Enron, WorldCom, and Tyco (Bebchuk Fried, 2004, p.27). CEOs can also indirectly award consulting contracts or make charitable contributions to nonprofit organizations that employ or are headed by a director (Bebchuk Fried, p.28).
Because of public outcry regarding corporate corruption, the Securities and Exchange Committee (SEC) adopted guidelines on what constituted an independent director in 2003. But under New York Stock Exchange (NYSE) doctrine, a director could earn up to $ 100,000 a year in such additional compensation (Bebchuk Fried, 2004, p.27) on top of their director fees and still maintain their independent status. This self-regulation has minimal impact because it still doesnt apply to non profit charitable contributions, and a firm still can direct more than $ 100,000 to an immediate family member who is a nonexecutive employee of the company (Bebchuk Fried, 2004, p.28).
I am writing to congratulate the Securities and Exchange Commission for acting on its proposed rule making executive compensation disclosure. Too often executives are richly rewarded even when their companies' performance is below par. Without better disclosure, shareholders, employees and the general public cannot evaluate whether executive pay packages are unjustly enriching executives at shareholder cost or providing fair compensation.
The newly enacted rules will make this crucial information more accessible to shareholders and the public. The new requirements to disclose total compensation figures, pensions and detailed compensation breakdowns will make it clear exactly how much top executives are earning and why.
I believe that CEO pay should be set by independent directors. Disclosure of all director pay from the company or its subsidiaries should be reported. For too long these loop holes have been left in these regulations.
I also urge the SEC to require that companies disclose pay-for-performance data. In order for investors to understand how pay and performance match up, companies need to explain more clearly what level of performance is necessary for a particular level of pay. I urge the SEC to require companies to disclose both the performance criteria and the performance targets they use when setting executive pay.
Sincerely,
Robert Donahue
Bebchuk, L. and Fried, J., Pay without Performance, The Unfulfilled Promise of Executive Compensation, Harvard University Press, Cambridge, 2004.