Even when their companies lose money, the top leaders of some major American corporations receive such grossly exorbitant pay packages that the situation has become a national scandal.
Since such steep costs of doing business are passed along to consumers in the form of higher prices for the goods and services of the firms involved, the public has a stake in this scandal.Even so, there are sharp limits to how far and fast Washington should try to get into the act. Instead, most of the repair work should be left up to stockholders and corporate boards of directors.
A few days ago the oversight subcommittee of the Senate Governmental Management Committee started holding hearings on the issue and possible reforms.
Why are various big companies paying their top executives $3 million, $5 million, $15 million or more at a time when profits are down, thousands of workers are being laid off, and families are struggling to stay afloat financially?
One reason is that corporate boards of directors, who decide compensation, are often dominated by friends of the chief executive and rely for advice on consultants hired by the CEO. It's not always a system that lends itself to vigilance.
Another reason is that current law lets American corporations keep their investors in the dark about the size and impact of lucrative pay packages for top executives.
Up to a point, the compensation packages can be defended as pay-for-performance agreements fairly negotiated in a free market. But the existing rules go too far by keeping the true value of executive stock option plans off the balance sheet while simultaneously allowing a company to report them as a tax-deductible expense.
In a free enterprise system, politicians ordinarily should not tell companies what to pay their executives. But the pay gap between boss and worker is growing so wide that giving stockholders more say makes sense. The Securities and Exchange Commission is considering a new rule to do just that. So would a Senate bill that stops short of giving shareholders veto power over pay raises but would provide them more input in corporate policy changes on executive compensation and require better disclosure of who is being paid how much.
One final point: Studies by at least one compensation expert have found little connection between how much the top boss is paid and how well his company is doing. That's good for executives, of course, but it's not the way a competitive economy is supposed to work.