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Answer:
Dear
Herb,
You
sent in your question a while ago and I've waited
to answer it until now because I've been hoping to
find evidence that your premise is correct. However,
there seems to be no definitive study concluding that
"reasonable" salaries make for a better company.
However,
you raise an excellent point and I recommend that
you read Warren Buffett's remarks about executive
compensation in his latest annual letter to shareholders.
As you probably know (because of your interest in
the topic), Buffett is chairman of Berkshire Hathaway
Inc.
Buffett
tells shareholders that "too often executive compensation
in the U.S. is ridiculously out of line with performance
" but he doesn't name specific situations. He then
goes on to say that "huge severance payments, lavish
perks and outsized payments for ho-hum performance
often occur because comp committees have become slaves
to comparative data."
He
explains that people who make the salary decisions,
(typically a comp committee) receive information all
year long about all the bigger, better and newer perks
that executives and managers across the country are
receiving. He notes that as a result "outlandish 'goodies'
are showered upon CEOs simply because of a corporate
version of the argument we all used as children: 'But,
Mom, all the other kids have one.'"
His
conclusion is also in agreement with your line of
thought. When an executive gets fired, says Buffett,
he often earns "more in that day cleaning out his
desk than an American earns in a lifetime of cleaning
toilets."
One
has to wonder how good that is for the company's balance
sheet.
Buffett's
bottom line: "Today in the executive suite, the all-too
prevalent rule is that nothing succeeds like failure."
You
can read Buffett's complete letter at: www.berkshirehathaway.com/letters/2005ltr.pdf.
His remarks about executive compensation actually
start on page 15. Prior to that, you'll find interesting
advice on various stocks Buffett owns as well as comments
on our trade imbalance.
Two
other supporters of your premise are some of the shareholders
at Hewlett-Packard and New York Attorney General,
Eliot Spitzer. Spitzer has filed a lawsuit against
former NYSE chairman Richard Grasso about his pay
package -- which was $193 million over nine years.
Spitzer says it violated the state's non-profit law.
When the suit was filed, the NYSE was a non-profit;
it's now a public company. Spitzer thinks Grasso,
who was fired in 2003 because of board concerns about
his salary, should give back part of the money.
In
the second example, some of the HP shareholders have
come out in disagreement over the $42 million severance
package that CEO Carly Fiorina received when she was
let go.
These
and similar cases have caused the Securities and
Exchange Commission to consider a plan that would
require all publicly traded companies to present their
executive compensation packages -- salary, bonuses,
perks, options, etc. -- in a clear fashion -- specifically
in language that we all could understand.
Tip:
You can keep track of the developments of this situation
at www.sec.gov.
Click on "Proposed Rules" and then type in "executive
compensation." If you feel strongly, why not write
to the SEC?
Another
change that seems to be in the wings relates to corporate
directors. Due to pressure from shareholders like
you, a number of companies are agreeing to give shareholders
the ability to vote directors out of their positions.
(Directors are the ones who decide how much top management
should be paid.) Details about this topic as well
as news about forthcoming annual meetings of particular
interest, new trends and confirmed action are posted
on the Institutional Shareholder Services'
web site at: www.issproxy.com.
In addition to checking the continually updated home
page, be sure to go to the "Press Room."
Good
luck!
BUYandHOLD
does not offer or provide any investment advice or
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or profitability of any particular security, portfolio
of securities, transaction or investment strategy.
Any investment decisions you make will be based solely
on your evaluation of your financial circumstances,
investment objectives, risk tolerance, and liquidity
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results.
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