Several people wrote in response to this post. #1:
I’m a portfolio manager, not an economist, but for what it is worth here is my take. From my perspective this would be a slow motion disaster for a variety of reasons. First, shareholders as a group haven’t got the knowledge or experience to assess executive qualifications, or even what exactly the company might require in the way of executive talent. Giving them a veto over compensation packages offered by the company’s directors (the shareholders’ own elected representatives), to the professional managers they hire, brings a vastly greater element of chance into the already fraught executive recruiting and retention process.
It would, also, drive yet more competent executives into the privately-held sector, since there are no public shareholders there to artificially and arbitrarily apply downward pressure to their compensation.
To top it off, think of the potential for public sector union meddling in all sorts of private business decisions. I can envision CalPERS demanding union-favored corporate policy in exchange for a “yes” vote on a CEO’s pay, can’t you?
There’s no doubt more, but this is what came immediately to mind.
When a CEO is picked by a board to take the helm of a troubled company; many times it is very late in the game and is difficult to make the corrections needed. The new CEO then takes actions that are generally not liked by the employees – but need to be done. This usually follows with senior management letting the board know they are not pleased. The board again takes action – letting the present “savior” CEO go and bringing on a new one. The new CEO has a good chance of working because the previous “savior” CEO took the action needed – but also became a pariah in the process and would never be able to be the growth caretaker that the shareholders, employees or the board could live with long term. Hence the ousted “savior” CEO needed some type of agreed upon severance, golden parachute, or incentive up front just to take the job. The government does not need to oversee that arrangement – for the mere fact, without those incentives very few would take the job. This of course is notwithstanding some of the idiots that should never be have been made CEOs’ in the first place who caused those companies to be troubled.
I’m not a practicing economist, but I hope that I can help with your bleg. The idea of having shareholders approve CEO “exit packages” is a sound one, but the problem often lies with the vote’s legality and execution.
The issue with many CEO contracts is that these packages (including generous and tax-efficient pension fund allowances) are included in the initial contract signed when the CEO takes office. I realize that McCain means well, but I don’t have to tell you that abridging the freedom of contracts is the slipperiest of all slopes when it comes to our legal system. If shareholders are to be given a vote about severance packages, that vote would normally have to take place before the contract is sent to the CEO for execution. Unfortunately, the corporate world isn’t like the State Department, where newly-posted ambassadors and DCMs have already submitted their resignations, should the need to make a quick exit arise.
Assuming that an elegant contractual solution can be found by a company’s directors, one also needs to deal with the actual vote. All companies have voting blocs and even an underperforming CEO still has friends on the board and amongst key voting blocs. A vote to change the corporate M&A needs to take place, followed by the vote on the severance package (I’m oversimplifying, but this is the main idea). In the real world, an underperforming CEO will be lobbying key voting blocs to get a result throughout this process. He or she will also try to drag as many corporate directors into the “mire.” In no uncertain terms, the CEO will frame his or her failure as the board’s failure and it’s up to the shareholders to see through the fog, which they rarely do.
Another reader points me to this interesting article about an economist who has concluded that “the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period.”