Before we run off and do this, I’d like to see some examples of countries that have done something like it, and how it worked out. Does anyone know of any?
OK folks, former Executive Pay consultant here. A few items:
Salary is the pay the exec gets for breathing. That is already effectively capped at $1 million. Any salary paid in excess of $1 million is not a deduction for the firm. This was passed the LAST time we got all huffy about exec pay. Google Section 162M for the details.
Bonus typically refers to the annual bonus, based on performance.
LTIP: Long Term Incentive Plan. These are typically 3-5 year bonus plans designed to pay out if the company hits certain milestones.
Stock Awards: THIS is where a lot of the big payouts come from. You find out that a CEO exercised $10,000,000 in options. However, what is the strike price, when did he get them, how long did he have them? That big payout might be the culmination of several years of gains in the company’s value. Shareholders LIKE that sort of thing. Company officer share exercises and sales are also tightly controlled, and also well reported on in the financial press. Some firms are known to REQUIRE that the CEO and other execs maintain a percent ownership in the firm equal to a multiple of their salary.
If you want to get upset, you need to look at TOTAL Compensation: salary, bonus, LTIP and stock. To learn what is going on, you just have to read the company’s proxy (DEF-14a filing). Those list the top 5 officers pay for the past 3 years. From that you can determine who is getting what.
I oppose a cap, because they will find a way around it. The big jump in exec pay happened because of the salary tax deduction limitation. A bunch of companies hired guys like me to design pay for performance plans, since salary was no longer a factor. We then got into stock plans as the market rebounded. The new proxy disclosure laws let us easily compare our client’s pay to other peer firms.
How dare you inject facts into our debate!
I had read a column once, don’t remember where, that linked the explosion in executive compensation to the anti-takeover hysteria that happened here in the 1980s. I remember this time well - I was in my 20s, and companies were scared silly that an investor like T. Boone Pickens would buy the company and sell the pieces. Congress passed laws to make this harder (how I don’t know), which basically insulated the board and executives from some of the pressure that stockholders would normally wield. Have you heard that?
The raiders helped trigger the poison pill defenses and the golden parachute regulations. The excise tax on golden parachutes is REALLY interesting, and I made a mint by knowing how to game the compensation system to stay just under the 2.99 multiple of past 3 year’s average cash comp when calculating the maximum amount of parachute available, even give stock vesting acceleration.
Wow - pulled THAT bit out of the musty recesses of my brain.
Change-in-control agreements were a big thing, and once you started putting more and more compensation into long-term vehicles you could get stuck with paying someone off when you fired them. An exec might quietly walk away from a big salary, but leaving millions in long-term incentive plan compensation on the table was another issue.
Who determines the salaries of people such as the President, Vice President, Cabinet Secretaries, Congress Critters and the like? (Serious question; I really don’t know)
The Congresscritters do. Suffice it to say that with the highest public-employee salary (that of the POTUS) currently set at $400,000, the pay received by government officials is pocket change compared to that of high-earning CEOs.
I don’t see how it could be applied on a constitutional basis because there is no methodology by which to apply it.
Nixon invoked a temporary freeze of wage and prices so I understand your point that government has exercised executive power in some form in the past. I haven’t been able to successfully google the mechanism behind the 1972 event. It would be nice to know how it was done for the purposes of discussion.
There is certainly a difference between Nixon’s temporary blanket policy and an arbitrary policy of government involvement in business decisions.
? Sorry, but what does that even mean? What is the “methodology” by which the minimum-wage legislation is “applied on a constitutional basis”? That’s a long-standing “arbitrary policy of government involvement in business decisions”, and its constitutionality seems to be perfectly fine.
Does anybody have any access to an actual legal authority in support of the claim that “maximum-wage” legislation would in fact be unconstitutional?
The problem with executive pay and bonuses is that it is gamed. The company has a compensation board that determines raises and bonuses. That committee is staffed by friends and subordinates of the big bosses. That is why a company can lose billions and still maintain or jack up bonuses to the execs. There are many examples of this. The money execs get is not due to their ability or performance. It is how well they control the boards.
You need a reason do something. Reducing someone’s wage has to have a basis of thought rooted in the Constitution otherwise it’s just an emperor’s decree. When Nixon did it there was at least the tepid idea that the country was in a financial crisis that needed temporary correction. The key words being “crisis” and “temporary correction”.
I think Tomndebb said basically the same thing. While I know this exists I don’t know the extent to which it is abused. what I see is the padding of income by becoming board members in other companies. On a personal level I saw business deals made based on what appeared to be mutual board member associations.
If the government wanted to limit executive pay, it couldn’t be “arbitrary” if they want it to pass constitutional muster. Given the importance of publicly traded corporations to our national economy, I can think of some good constitutional justifications for limiting executive pay, though I don’t necessarily believe there are good practical justifications for doing so.
I think this is correct.
I would add that I think the answer is not so much to limit pay, but have it linked to the long term health of the company. As I offered on these boards a month or so ago, maybe have any bonus not paid out for two or three years. And then, only if it is believed that the CEO’s work done in the year the bonus was issued did not undermine the company. Additionally, as gonzomax said, the boards are a problem. I’d remind them that they have a fiduciary responsibility to the financial health of the company. So, if a board issues a few hundred million to a CEO as he leaves and the comaony flops right after, I’d hold them accountable, both legally and financially.
Well, it’s got to have a basis of thought that is not prohibited by the Constitution. But there doesn’t have to be anything in the Constitution specifically pertaining to that topic for it to be constitutionally valid. For example, there’s nothing in the Constitution about setting minimum wage levels, yet that is constitutional.
Again, I’m going to have to see an actual legal authority arguing against the constitutionality of salary cap legislation before I’ll take seriously the notion that it would be unconstitutional. Hey, Barack Obama’s a constitutional-law scholar and he’s not doing anything just now, right? maybe we could email him. 
I don’t have an answer to the OP, but I would just like to state that the argument that it’s necessary to pay CEOs exorbitant amounts of compensation to attract executive talent is complete bullshit. If a CEO is doing his job for $60 million, he can jolly well do it for a quarter of that. Like anyone is going to say “SCREW THIS! My time isn’t worth a piddling $15 million! I’ll be in my jet.”
Nice post, Algher.
Proposal: All compensation plans that include rewards for events incidental to executive performance shall not be consider incentive compensation plans as defined by Section 162M. (Translation: you can’t benefit from general changes in the stock market price.) All compensation received that can be reasonably or unreasonably construed to be linked to executive salesmanship shall be redefined as a nonincentive plan. (Translation: payouts shall be in assets put in escrow, to be restricted from sale for many years. When the sales finally occur, it shall be on a date during the year unknown to the executive. The executive may use these assets as collateral for an armslength loan by a third party.)
Specific regulations regarding the above shall be designed by a committee headed by Buffet, Volker, Rubin, Greenspan and various members of the Great and the Good.
So, you think we are not in a crisis at the moment? And that no correction is needed, be it temporary or permanent?
And what about:
“I have no f** idea how I should spend $ 60 million, but damned if I’m going to take home less then that Jones over at BigShot Inc that I play golf with every week. I couldn’t face that smug bastard otherwise”.
That is why I think top wages should be capped. There is no end to the narcissm of top dogs like that. They’ll run each other into a brick wall, on the tax-payers dime, before admitting the defeat of lesser pay.
It’s much like the ever increasing spending on political campagning. If the Dems spend exorbitant amount X on buttons and lawn signs and little flags and television ads, how are the Pubbies NOT going to top that, and vice versa?
I don’t think we’re in any crisis that is at all related to executive compensation.
And as has become painfully clear these bastards were getting bonuses under false pretenses. They weren’t special talents requiring top dollar payments for their unique abilities. They were just a pack of greedy, looting charlatans who are now sating their unabated greedy appetites like pigs at a trough.
I would have no problem at all with a ‘Fraudulently Obtained Bonuses Reclamation Act’.