We have previously noted the wretched state of executive compensation in corporate America. Now a modest attempt to shine some light on the varied ways executives are compensated is coming under attack.
James Surowiecki in the New Yorker weighs in the topic. Apparently large institutional shareholders interested in obtaining better information on the state of executive compensation prompted the SEC to act.
Surowiecki makes two important points. The first is that executive compensation is important because of the sheer scale of the dollars going out the corporation’s coffers lining executives pockets. The second is that academic finance has found that overpaid executives engage in all sorts of activities detrimental activities. Surowiecki concludes:
This doesn’t mean that all lucrative pay packages are a waste of money. But, more and more, big investors are treating excess compensation as a reliable index that something serious may be wrong. In particular, it’s often a sign that a company’s board of directors is catering to the C.E.O.’s whims rather than supervising him. While the S.E.C.’s new rules won’t solve the problem of weak boards or overweening C.E.O.s, they will make it easier for investors to figure out exactly who is being paid what, and to make an informed decision about whether to buy or sell a stock. We shouldn’t expect to see a dent in executive compensation anytime soon. But in the long run companies that don’t balance pay with performance tend to suffer where it matters most—in the stock market.