On the face of it, there is an air of unreality about the statement today from the Treasury secretary, Timothy Geithner, on executive compensation. The American economy has lost more than 2 million jobs in the first four months of the Obama administration. And Mr. Geithner's big concern is that those Americans lucky enough to still have jobs might be making too much money? A lot of Americans would probably like to have that problem again.
The more you get into Mr. Geithner's statement, the more detached from reality it is. Mr. Geithner: "We will propose legislation giving the SEC the power to ensure that compensation committees are more independent, adhering to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act." As if those independent audit committees created by Sarbanes Oxley back in 2002 were such a big help in detecting off-balance sheet assets and overvalued on-balance-sheet assets at the big banks. As if.
A New York Times article reports that also today, the Obama administration appointed a "pay tsar" with "with broad discretion to set the pay for 175 top executives at seven of the nation's largest companies" Reports the Times: "From his nondescript office in Room 1310 of the Treasury building, Mr. Feinberg will set the salaries and bonuses of some of the top financiers and industrialists in America, including Kenneth D. Lewis, the chief executive of Bank of America; Vikram S. Pandit, the head of Citigroup, and Fritz Henderson, the chief executive of General Motors."
A big part of the Obama administration's initiative is backing a proposed "say on pay" law that would give shareholders a vote on executive pay. In this paper, a professor at UCLA Law School, Stephen Bainbridge, blows the arguments for "say on pay" out of the water, observing, among other things, that star actors and athletes make more money than corporate executives, yet no one, least of all the Obama administration, is agitating for votes on their pay. He also argues that this is an issue better left to the states than to the federal government.
Mr. Geithner's statement says that "say on pay" has "already become the norm for several of our major trading partners." He also says, "This financial crisis had many significant causes, but executive compensation practices were a contributing factor." Indeed, as this paper points out, Great Britain, one of America's major trading partners, adopted "say on pay" in 2002. Yet the British financial sector is in just as bad shape, or worse, than America's is, calling into question the idea that "say on pay" would have prevented the financial crisis.
Under the law Mr. Geithner proposes, "compensation committees would be given the responsibility and the resources to hire their own independent compensation consultants and outside counsel." This would be a windfall for lawyers and compensation consultants. But where are these "resources" to come from? From the profits that would otherwise go to shareholders. For some companies, the money spent on lawyers and compensation consultants may be more than whatever the chief executive was overpaid before the lawyers and compensation consultants were hired. The other resource to consider is the time of directors, which might be spent more beneficially on activities such as strategy or succession planning, and which now will be spent increasingly on engaging and overseeing lawyers and compensation consultants.
The consequence of all this may be to chase more talented executives out of publicly held companies and into hedge funds and private equity firms or companies they control. The loser in that case would be the small investor, for whom the chance to vote "no" on the pay of his chief executive officer may be small consolation for being deprived of management whose performance is worth endorsing with a "yes" vote.