Executive salaries set to fall as boards try to win back shareholder trust: Kohler

President Barack Obama has taken the debate about executive pay to a whole new level by imposing an absolute cap of $500,000 on salaries in companies that are bailed out by the US Government.

It’s true that Obama’s new pay cap is a specific condition for getting “extraordinary assistance” and doesn’t apply generally.

And, as blogger Yves Smith of nakedcapitalism.com remarked this morning, it closes the gate after the horse is in the next county.

But after his speech, administration officials briefed reporters that the President intends these standards to mark the start of a long term effort to introduce a “sensible framework” for executive compensation, according to the Wall Street Journal.

It’s suggested that the new Obama administration is now going to follow Australia down the path of “say on pay” rules that give shareholders a non-binding vote on executive salaries.

In his address, President Obama made a crucial point: “In order to restore our financial system, we’ve got to restore trust. And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidising excessive compensation packages on Wall Street.”

Two days ago, Robert Gottliebsen and I conducted a special roundtable on executive salaries with the global consulting firm Mercer and a group of company directors and consultants.

One of the key points to emerge from the roundtable was the fact that boards have, to a large extent, lost the trust of shareholders, which is why such elaborate and detailed incentive plans have been devised.

Under the previous Democrat president Bill Clinton, the US had its first attempt at limiting executive pay by banning corporate tax deductions for salaries above $US1 million.

This became a model for the law of unintended consequences, because it merely resulted in an explosion of non-cash salaries, in particular options and other share-based schemes.

The new absolute cap of $500,000 only applies to the companies receiving “extraordinary assistance” (undefined at this stage) and has the disadvantage of being a blunt instrument.

Specifically it doesn’t deal with some of the ridiculous and elaborate bonus schemes that have emerged in recent years, and which have served to focus CEOs on short term risk-taking while courting long-term disaster.

These issues were the subject of much lively discussion at our roundtable on Tuesday.

It was agreed that in many cases incentive schemes are simply disguised base salary – a board needs to deliver a certain sum to a CEO and it’s just a question of how they get there.

One member of the panel, the chairman of Goodman Fielder, Max Ould, said he thought elaborate and complex incentive schemes simply don’t work.

As for a political response in Australia, there has definitely been more talk than action. But restraint is likely anyway. The members of our roundtable panel all agreed that the economic downturn and the growing shareholder backlash would result in boards restricting salaries.

Some will announce executive pay freezes to set an example for the restraint that will be demanded from the wider workforce; some will look internally for CEO succession, which is generally cheaper than headhunting someone from elsewhere – especially the US.

The global debate about executive pay has only just got going, and will possibly never end.

Australia’s fairly new system of remuneration report and non-binding vote has transformed the debate in this country by giving shareholders a forum for expressing their views and influencing directors.

During the boom, discussions around remuneration reports were focused on whether bonus hurdles were transparent and appropriate.

Now, with share prices having collapsed and profits falling, it was agreed that the focus will shift to the amount actually being paid, and whether it was reasonable in the circumstances.

An interesting point of discussion in our roundtable was what to do about a CEO who does a great job in difficult times, but nonetheless sees profit and share price still falling.

That, it was agreed, gets back to trust, and the problem for boards is that to a large extent it has been lost.

As a result their room to move in paying their executives well for good performance over the next few years despite falling profit and share price will be severely limited.

This article first appeared on Business Spectator