Phil Gramm’s Views on CEO Pay Are Ignorant and Insulting

Yesterday, in testimony before the House Financial Services Committee, former Senator Phil Gramm called objections to inflated CEO pay and calls for better disclosure “bigotry against the successful.”

He also said that the $75 million retirement package for Ed Whitacre at AT&T (it was more like $137 million) was “an outrage” — because it was not enough, describing him as “exploited.”

This testimony is astonishingly boneheaded, considering that it comes from a former Congressman and Senator who got to see what corporate failure looked like with the collapse of Enron, located in his state and with his wife, Wendy Gramm, on its board.

There are two core passions at the heart of the American spirit. One is unlimited opportunity. There is no bigotry against the successful. Going back to the earliest days of this country, we have nothing but admiration for those who succeed, whether children of poor single mothers who grow up to be President to nerds who drop out of college and become the wealthiest men in the world before their 30th birthdays.

But the other core passion of the American spirit is for justice. We love to see someone succeed and be rewarded for success. What we do not love is seeing people divert the rewards earned by others to their own bank accounts. That is where the exploitation is. The data on CEO pay show that the ROI for investors is poor, pay is not tied to performance, and shareholders who object to the structure of pay plans have no recourse beyond symbolic “no” and “withhold” votes.

No one wants companies to succeed more than their investors do. That is why they entrust their money to the executives. Someone needs to explain to Gramm that if CEOs get to pick the people who set their pay, it is not the executives who are being exploited.

One thought on “Phil Gramm’s Views on CEO Pay Are Ignorant and Insulting

  1. With permission, we are posting two comments from LinkedIn:

    James Bourchier
    In Australia in 2011 there were controversial laws passed that included, among other things, a criminal offense for an external party to be paid to give remuneration advice in relation to key management personnel (KMP) to anyone other than a non-executive director. While controversial, I think this was one of the best decisions in relation to remuneration governance that I have seen. I think Australia is now a world leader in terms of remuneration governance and the direction in which remuneration governance is heading. As a KMP remuneration consultant specialist (that is all we do), I can attest that it has led to very different conversation being had, when our clients are non executive directors rather than management. However, I can also attest that there has not been a massive shift in quantum of remuneration, or even the rate of KMP remuneration increase (based on our database which covers effectively the whole ASX market). The other reform that came through with the change of law was that a minority of shareholders (25%) were able to give a “Strike” against Remuneration Report, which is a compulsory item to be voted on at every listed company AGM (and can lead to a board spill if a second strike occurs). This too has dramatically shifted the conversation, quality of stakeholder engagement, and quality of consideration at the Board level, but not changed remuneration practices much. An unintended consequence however has been that proxy advisors have been handed arguably far too much power in the arrangement, and they have extremely limited accountability. The dynamics are still playing out, but I think overall the change has been very positive, and I certainly think that ensuring that external KMP remuneration advice is only given to non executive directors is without a doubt a sensible idea. I am surprised the USA seems to be lagging behind the rest of the world when it comes to governance in this space, but don’t necessarily expect to see a massive change in remuneration practices even if you do get the stakeholder engagement, independence and accountability you rightly seek.

    Peter Swabey
    Agree with James. Actually, I would go further and argue that inflated executive pay which is not subject to shareholder oversight is, quite simply, a form of malfeasance.

    The Australian model, restricting who can receive remuneration advice and a two-strike sanction, is similar in part to the UK model of a mandatory vote on pay policy with the directors being personally liable for payments made outside the agreed policy. Both are, I think, good steps towards a solution of the problem but, as James says, don’t expect to see major change soon, because all the time one significant jurisdiction doesn’t have strong rules about executive pay there will be a degree of arbitrage – in that the ‘best’ executives will tend to gravitate to that country – and companies based in other countries will feel the need to ‘match’ packages where they are permitted to do so.

    We are already hearing from companies who argue that their pay policy will not permit them to compete for the ‘top’ executives.

    James Bourchier
    I would also like to agree with Peter that USA practices do come up as an issue of competition amongst the larger listed companies, particularly those with international operations. More than once we have had to grapple with the issue of a a USA based business unit manager pushing for remuneration that would exceed the company’s Australian group CEO level of remuneration (at the locally appropriate level), which creates challenges for policy, practice, attraction, retention and ultimately risk management. These are indeed interesting times in the world of executive and director remuneration which is becoming ever more global.

    Like

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