CEO Pay and a Case for Stakeholder-based Management

CEO Pay and a Case for Stakeholder-based Management

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CEO Pay and a Case for Stakeholder-based Management

CEO pay became a core issue of Clinton’s 1992 campaign, during which he pledged to eliminate corporate tax deductions for executive pay in excess of $1 million a year. In the 1993 budget legislation, this policy became part of the U.S. tax code, known as Section 162(m). But it came with a few qualifiers. The most significant was the exception for executive pay based on specific corporate performance goals, called “performance pay.”

The IRS offered a technical definition for performance pay but, to corporations’ collective glee, allowed a lot of room for interpretation, so companies quickly began moving executive pay from salaries to mainly stock options and restricted stock grants.

And when “pay for performance” is based on the company’s stock price, it is really “pay for luck,” because more of the share price performance that CEOs are paid for is driven by broader macroeconomic factors, particularly economic upswings, than anything the executives did. But when the economy declines, and the share price goes down with it, executives are usually not penalized. Marginal productivity theory seems to move in only one direction.

At the heart of almost every effort to curb CEO pay have been the assumptions of marginal productivity and shareholder primacy. There is no silver bullet to slow the growth of CEO pay. It requires all the tools in our toolbox—the tax code, disclosure and accounting rules, and so forth. But none of those will be fully effective without rethinking the very purpose of the corporation, a question that is too often outside the scope of debate.

Yet there is plenty of evidence that shows us that when CEOs are paid with stock—either options or grants—it can enable executives to become very wealthy very quickly without bearing much risk at all. This creates the financial motivation for CEOs to make shortsighted and very high-risk decisions in order to boost their company’s stock prices, which will ultimately line their own pockets. The effects of this behavior, particularly with CEOs in the financial industry, can be measured in higher share-price volatility (meaning large swings in share prices) and in bank failures, such as those of 2008 and 2009, which had profound consequences for the broader financial and economic system.

The next steps in controlling CEO pay fall into two categories. The first should involve reconsidering and reversing the failed practices that were the result of shareholder primacy. The second would begin to advance the vision of the stakeholder corporation.

And if you want proof of just how much money is being sucked out of corporations by shareholders through stock buybacks and dividends, see:

That Sucking Sound? It’s the Stock Market

http://www.the-vital-edge.com/stock-market-concentration-of-wealth/

And if stakeholder principles interesting, you can check out:

The Stakeholder Argument: Why Stakeholder Principles Matter

http://www.the-vital-edge.com/stakeholder-argument/

http://evonomics.com/milton-friedman-doctrine-wrong-heres-rethink-corporation/?hash=cc267023-5a86-47fd-913f-7eb9d324c4a2&utm_medium=social&utm_source=facebook

3 comments

  1. I found this a very coherent article.

  2. Me too, Gregory Esau. Glad you liked it.

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