But for those of you who believe top management is paid too much, don't get your hopes up too high. While we may see fewer outrages, such as $140 million severance package Richard Grasso garnered on leaving the NYSE, it will do little to change executive pay.
What few people remember is that Richard Grasso's pay and severance package (a.k.a "deferred compensation") was based on "benchmarking" against the pay of other CEO's at large companies.
The Verizon shareholders, led by the 100,000 strong Association of Belltel Retirees Inc., have really asked for little more than tying pay to performance. In other words, they think it is fine for Ivan G. Seidenberg, Verizon's chief executive, to enjoy a package worth $20 million just so long as he creates value.
This is nonsense. Measuring who is responsible for creating value in an large company like Verizon is at best an uncertain task. Verizon was the result of the merger of Bell Atlantic and GTE. In other words, Verizon is a descendent of the old AT&T, the former telecommunications monopoly. If Seidenberg had started the company, he could have become rich on his investment, but he took over the top position at a company with a 100 year plus history. He was not required to bring put up his fortune. He is a hired hand who works for the shareholders, at their pleasure. In order for him to be worth $20 million a year, they shareholders ought to be convinced that hiring someone for a $1 million a year would mean that the company would make at least $19 million less. The problem is that they don't know how to measure Seidenberg's contribution or compare it to what the contribution of a substitute would have been. Seidenberg's worth is, excuse the term, a matter of faith.
My argument, I realize, may strike you as even bigger nonsense. But in order for me to be wrong, then there must be a market for executives that requires multi-million dollar payouts. But if you believe, as I do, that there are probably hundreds of qualified executives who could run Verizon, and who would be willing to do it at a lot less money, then we have a classic case of market failure.
Figure out who creates value in cases of complex causality, e.g., financial performance at large companies, is not easy. As regards CEO's at these companies, there is significant human resource asset substitutability. In other words, value creation is not dependent on a specific someone holding the top post; what matters is that one of a large number of qualified someones is CEO.
In the quarter-century, CEO's have worked with their boards and executive pay consultants to create an imperial CEO who receives a treatment akin to that of a head of state and compensation that sets him apart from masses. Like the kings and priests of antiquity, his pay has instantiated within the social institution of the giant firm and, hence, decoupled from economic value creation.
If I were a shareholder of Verizon, I would limit CEO pay to $1 million a year, plus a modest pay-for-performance package that was part of company-wide profit sharing. But before anyone jumps on the bandwagon, a word of caution. My idea would surely fail. Verizon would be taken private in no time, thanks in part to favorable tax legislation; former Verizon executives would get rich on fees; and middle and lower level workers would get screwed.
Unfortunately the current system, with its institutionally legitimated inequalities, will endure. The imperial, super-rich CEO is an accepted social fact by the players who make the rules. In response to corporate governance reformers, the worst excesses will be rooted out, but the fundamental dynamics of corporate power and pay will not change. The reward for making it to the top of a huge corporation will continue to be incalculable wealth, warranted or not.
We take it from www.davidbruceallen.com