NCPA - National Center for Policy Analysis

The Duty Directors Owe Shareholders: Hold CEOs Accountable

September 4, 2001

Some corporate CEOs make record pay in years when sales and profits fall, when stock prices nosedive, and workers are laid-off or forced to give back wages and benefits. The gap between CEO compensation and employee pay has risen (see figure).

But CEO pay doesn't come out of the pockets of employees, it comes out of shareholders' pockets. They are the ones who should be complaining.

Shareholders have bought the argument that tying CEO compensation to stock prices, through stock options, encourages corporate management to act in the best interest of shareholders -- the corporation's owners.

Unfortunately, when share prices fall, many CEOs take care of themselves and let workers and shareholders suffer while they prosper. A common technique is to get corporate boards to reprice their stock options, so that they make money even though the stock price has fallen.

  • Boards rationalize this by the need to attract and keep good managers, but it makes a mockery of the idea that rewards should be tied to risks.
  • Boards are often stacked with members picked by or beholden to CEOs.
  • Also, directors may serve on many corporate boards, leaving them little time to fulfill all their responsibilities.
  • Or directors may represent large institutional stock owners, such as mutual funds, whose CEOs benefit from the same deals, and thus are unlikely to rock the boat.

If large bonuses are justified when sales and profits are high, there should be negative bonuses in bad years, forcing poorly performing CEOs to pay a real price when they don't deliver.

It is up to corporate boards to ensure that their CEOs' pay is tied to performance. Sweetheart deals with CEOs not only violate directors' fiduciary responsibility to shareholders, but also undermine the very foundation of capitalism.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 3, 2001.

 

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