THE REGULATION OF EXECUTIVE COMPENSATION IN THE UNITED STATES: QUO VADIS?

In the United States today, perhaps no issue is a quicker litmus test of economic worldview than multi-million-dollar executive compensation in public companies. Some hate it, some love it and the rest analyse it.

In the first camp are leaders of labour unions such as the AFL-CIO. Demonising top pay as a sign of executive greed, they have dedicated a website (Executive Paywatch) to exposing high-figure paychecks, and have targeted this issue in a variety of proxy resolutions – 43 since 2006 in the top 200 companies. At the other extreme, scholars at free market think tanks such as the American Enterprise Institute, the Ayn Rand Center, and the Heritage Foundation, as well as various conservative-leaning universities such as the University of Chicago, have argued for the other side. Pay, they say, is really not as high as reported, when all factors are considered, and besides, they say, the motivational power of high pay awarded to corporate leaders can lead to greater prosperity for employees. In between these two views are the moderates – directors, institutional investors, and others who ask only that pay link to performance.

But this raises a two-fold question: how to define pay, and how to define performance? Increasingly, regulators want to get involved in both issues.

Indeed, pay-for-performance is a current theme as the major 2010 legislation called Dodd-Frank enters its final stages of implementation after nearly three years. Most compensation provisions in Dodd-Frank have resulted in final rules, but a few have yet to be developed – notably compensation-related provisions found in Section 953 and 954 of the Act. Directors and advisers need to be on the lookout for pending rulemaking in these areas.

Jan-Mar 2013 Issue

National Association of Corporate Directors