Say on Pay is the new norm in the United States. Three years of work and we are starting to fall into a pattern. In Europe and much of the rest of the industrial world, it has been around long enough for there to be strong proposals for new reform. The arguments for continued reform are that executive pay is not aligned with shareholder returns and it is way, way, way too high! Whether executive compensation is too high is largely dependent on whose pay you are looking at. I have written before about the hundreds of thousands of CEOs whose pay is unlikely to draw any outrage from the average person much less investors. In a free market economy, it is unlikely there will be a cap put in place although tax reform or other regulations may once again be used in an attempt to curb the rise of the tippity top of executive pay. (WARNING: These things tend to not work as planned.)
The issues of better aligning pay with shareholder value and goals are far more nuanced. Do we align pay with specific shareholder desires? Should a company listen the demands of a shareholder who invested purely to garner a quick short-term gain at the expense of the company’s long-term health? What is a reasonable measurement of success and how can we ensure that pay programs can evolve as this opinion changes?
For nearly every argument against the rise of CEO pay there is a counter-argument based on data or the risk of upsetting the entire system. Let’s face it. For the most part, the system generally works for investors and executives. It may not always work for the rank and file but that has very little to do with aligning pay to shareholders.
So here’s the crazy idea.
What if investors had the voting power of their holdings weighted by the length of their investment in the company? The longer a share was held the more power of the vote (perhaps with full power coming at 3 or 5 years). Even more revolutionary, what if the power of the vote was dependent upon the shareholder staying invested in the company for at least the same measurement period as that imposed on the compensation program?
What if the executives had to give up some or all of their potential severance packages in return for this mind of commitment from investors? Could such a thing even be devised? Would this type of program be executable for any reasonable length of time?
My guess is that few investors would jump into this kind of arrangement. I would also guess that most executives would be unlikely to see this as useful. But, absent any amount of self-control by the executives (and those who advise them) and any balanced and committed investing by the largest shareholders we will continue to see flawed regulation or the need for an entirely new voluntary covenant between shareholders and executives. Which do you see as a more likely possibility?