Executive Envy explains what happened last time Congress reacted to “exorbitant, outrageous, immoral, offensive” CEO compensation — it made things worse:
That’s exactly what happened the last time Congress waded into this thicket of envy, capping the tax deductibility of salaries at $1 million in 1993. Corporate boards — which hire and set the pay of CEOs — naturally reacted by finding other ways to compensate their most important employees.A favorite route was with stock options, which during the dot-com and stock-market bubble of the late 1990s rewarded even many lousy CEOs as if they were Jack Welch. But instead of giving Congress its share of the blame for this unintended consequence of populist opportunism, the financial press finds it easier to keep shouting ‘greed.’
A recommendation:
No doubt some executives earn more than their performance deserves, but that ought to be an issue for shareholders. And the best way to give shareholders influence over managers and their pay is to restore the market for corporate control — that is, remove the legal and other impediments to takeovers.The CEOs and boards most likely to pad their own pay despite lousy performance are those who know their jobs aren’t at risk. Yet the poison pills, staggered boards and other anti-takeover tools that have proliferated in recent decades don’t receive the same political outrage. If certain media moralists want to oust bad CEOs, they should call for a repeal of the Williams Act, which requires that investors disclose any large share accumulation to the broader public. This has the effect of preventing quiet accumulations and making takeovers less profitable and more difficult.