Executive Larceny

I commented last week on 5/3 Bank CEO Kevin Kabat's pay because it seemed particularly germaine to West Michigan. 5/3 is one of the area's largest banks as well as a big employer. They even have their stupid name on our minor league ball park.

However, one could make the argument that Kabat's pay was really not much to talk about given the truly obscene payouts given to executives whose banks did far worse than 5/3.

The essential fact is that the governance system controling most public corporations is so broken that the word corrupt is not out of place - and the people who are being screwed are all the shareholders who have put their money into IRAs because that is what the government now requires us to do if we want any semblance of a secure retirement.

Here's how the game works: CEOs put as many friends as possible on the Corporate Boards that decide their pay, including other CEOs who want to see their own pay escalate. The rest of the Board is typically corporate officers who work for the CEO, so they also have an incentive to take care of him or her. And don't forget that Board member themselves are paid fat fees for going to a few meetings a year so they also have an incentive to make nice.

The Board than hires a consultant to tell them how much they should pay the CEO. These consultants are usually head-hunters who get paid a percentage of a CEO's pay when they place one at a new firm, so they also have an incentive to see pay go up. They also have an incentive to make CEOs happy, because they are the people who hire them.

If the stockholder (that's you) is represented by anyone, it is executives of mutual fund companies - who are also in the game of making their own pay go up! This leaves only the public pension and union retirement funds to look out for your interests. Unfortunately, they are outgunned and have their own issues to deal with.

So other than Henry Waxman (god bless him), there is no one deciding executive pay who is not seriously conflicted and biased towards paying more. After all - it's not their money. It's the shareholders', and the Board (which is supposed to be representing them) really doesn't give a damn.

Here's how Representative Waxman put it today:

“There seem to be two economic realities operating in our country today. Most Americans live in a world where economic security is precarious and there are real economic consequences for failure. But our nation’s top executives seem to live by a different set of rules.”