Executive Pay: What About Directors' Earnings?

Posted by: Jena McGregor on February 6, 2009

It’s been a big couple of weeks in the world of executive pay, as President Obama proposed $500,000 salary caps for banks taking part in future bailout funds and the country jeered Wall Street bankers’ $18 billion in bonuses despite a disastrous year for their companies.

One factor that’s missing in the debate is a look at how much the people make who are setting the pay. The always insightful Bob Sutton posted a blog yesterday (“CEO Compensation Research: Why You Want Rich People to Set Your Pay”) that Treasury Secretary Timothy Geithner should be reading. In it, he talks about a 20-year old study by his colleague, Charles O’Reilly, and former compensation consultant Bud Crystal. The study found, unsurprisingly, that for every $100,000 the average comp committee member is paid, CEO pay goes up another $51,000 per year. The study, Sutton notes, “is based on research on social comparison and anchoring — the idea is that members of the compensation committee would use their own pay as a guide to help determine how much to pay the CEO — and would be excessively swayed by this vivid information.”

It makes sense, of course. Ten million doesn’t look like a whole lot to someone else who makes 20 million. And that’s before the fees they get paid as directors, which, according to the Corporate Library, grew by 12% in 2008. There’s a lot of focus on executive pay. Maybe there should be more on how much directors make, too.

UPDATE: The Corporate Library updated its numbers on Feb. 9 for board compensation increases. For the third year in a row, board pay grew by double digits. The median increase in total board compensation was just under 11 percent, the Corporate Library reports, while the median increase in compensation for individual directors was slightly higher, at almost 12 percent.

Reader Comments

Bob Sutton

February 7, 2009 1:16 PM

Jena,

Thanks for pointing to this research. Note that more recent research by Charles looks directly at the impact of directors' fees. As I say in the post, quoting this newer research, ""On the average,for every $1,000 more in fees that is given to the chair of the compensation committee,the cash compensation of the CEO is $1,746 higher." Not bad, huh? I wish I could find an investment with that good a return.

Steve Savasky

February 7, 2009 2:43 PM

In my opinion no single individual may serve on more than one corporate board.

Betty Wimbs

February 7, 2009 3:41 PM

What about the cost of keeping the west
wing of the white house 80 degreeshow much does it cost.
How much does it cost to fly Air Force one to camp David .
How much does it cost to keep camp david operating.
How much does it cost to fly air force one to Chi-car-go.
I vote to close Camp David.

jon smith

February 7, 2009 4:31 PM

They claim the lower employees are not motivated or satisifed by money. Why so much pay near the top, then?

JR

February 7, 2009 4:34 PM

This demonstrates quite clearly that the roughly 100 year old experiment with the modern corporate structure is in desperate need of refactoring. 100 years ago most corporations were closely held, even if they were stock companies. Today the opposite is true. Most stock companies today are owned by hundreds or thousands of investors with very little direct knowledge of the activities of both management and the elected board. The checks and balances are no longer working properly, and boards in every company are failing in their responsibilities to hold management accountable.

The post modern corporate board structure needs to include a wider set of constituencies... some representing customers, some representing rank and file employees, some representing management, some representing typical investors, and some representing local communities. This kind of diversity needs to be forced by government, because its not going to happen on it's own.

Dave

February 7, 2009 4:42 PM

Bravo to Obama for shining the populist light on excessive executive and managerial pay. For far too long excessive compensation has been rationalized. Any place the market process has been compromised and control exercised by a few there have been imbalances - add consultants, lawyers, doctors, dentists, athletes, and even some public sector managers to the list.

Counselor1

February 7, 2009 4:57 PM

Corporate compensation committees have no more spending restraint than the federal government. Both "profit" in a loose sense, from economic expansion, have short term focus and immunity from consequences. In the case of CEOs - CFOs etc., the basic motivation for such enormous pay is to get them to do the dirty work to raise the price of the stock, whether it is by rape of the environment, production and advertisement of harmful products, corruption of government officials, laying off thousands, or taking tremendous risks with other people's money. Only a system in which there was personal financial and criminal liability rather than sovereign or quasi-sovereign immunity could change this.

ken

February 8, 2009 3:31 AM

Obama's is largely right. How can millions be losing everything and the Wall Street Cream of the Crop get's the huge bonuses without losing an ounce of sleep!

Ron Eddo

February 8, 2009 5:25 PM

To All of the responders above:

You could have just moved to Zimbabwe.

Marvin8

February 8, 2009 5:41 PM

Neither the writer of the article nor you folks GET IT.
The game's over....as in Finished, Kaput, stick a fork in it, done. This is just the BEGINNING of the Depression. There IS no solution. There IS no cure. Everybody's used to a quick fix, but it ain't gonna happen anytime soon. It's gonna get a HECK of a lot worse. How else do you unwind 20+ years of an economy based on credit? You think a simple stock market tumble accomplishes that? Rosy-eyed optism won't even buy you folks an apple, and by the time it's all over, and the outrageous leverage is unwound, folks will be calling for the HEADS of corporate directors, not to mention the CEO's. There's no solution but plenty of pain to come. Listen to your great grandparents.....

Mac

February 8, 2009 5:42 PM

Directors hide behind the CEO, so that if illegal practices that they have previously approved come to light, they can cut him/her loose to dstract from their own malfeasance. They make sure the CEO has a guaranteed platinum parachute first, since that is part of the deal. Then they can "admit no wrongdoing" on the part of themselves and continue business-as-usual.

Harold

February 8, 2009 5:43 PM

The time is ripe to start moving towards a no vote(rather than an abstain) on directors elections; making it easier to nominate other directors and giving shareholders greater direct say on executive pay and conduct. Maybe Vanguard or Fidelity or others would lead the way instead of always voting for the "house" slate and proposals.

solomon

February 8, 2009 5:59 PM

@Dave:
Doctors? Dentists? Ever heard of malpractice in other fields you mention?

If anyone in this society is overpaid it is the entertainment clowns, but someone's gotta distract the working (and especially non-working) people from thinking and asking too much, right?

Anpadh

February 8, 2009 6:07 PM

It's like this. Suppose you buy a $20,000 car that you pay for, in full, the day you buy the car. The car is always fully insured. For 5 years, you do business that requires your car and you make a decent salary plus the purchase price and cost of maintenance of the car, including the cost of insurance. Then, one day, someone agrees to pay you $20,000 to get him from point A to B, even if it means you have to total your car. So, now, your car is totaled. But what's your actual loss? ZERO! At most, you may have to pay $2,000 deductible. For that, you get your medical expenses covered, plus the cost of a new car. Plus, you get to keep $18,000. It is pretty much a win-win situation for you. The insurance company loses nothing because it knows it has to pay out some time. Even if you don't get back the whole $20,000 or a similar car, in exchange, still you profit, and the insurance company profits too.

That is how it is, with the executives of the big companies. They ran the companies into the ground, and got paid handsomely for doing so. Plus, the government a $700 billion insurance cheque last year and is in the process of writing another $900 billion cheque this year. What they get paid this year hardly matters. Whether they each get $5 million, $500,000 or $0.05, they still have enough money for the rest of their lives. Plus, in 5 years or 10 years, when people forget who the CEO of Bear Stearns, Merill Lynch, o Wachovia was, all of those CEOs will once again have jobs that will pay them multi-million dollar salaries.

I wouldn't worry about the CEOs. I worry about the little guys -- the guys who make $5 to $25 per hour and often don't have full-time jobs, health insurance, reliable transportation or enough money for $4 gas AND groceries on the same day. These are the unfortunate people who must decide whether to put food on the table or buy medicine for their kids, on any given day.

Bill Couture

February 8, 2009 6:08 PM

The history of this stuff is that the ownership group always gets around it. Seems to me that the best way to handle it would be to increase short term capital gains taxes and the rate on the upper brackets. That would at least tend to force these people to look at more long term stratigies since the quarterly reports would be less likely to get people selling their companies stock.

Business is against card check off for employees to join a union. But we have card check off for stockholders to vote. Teightening up the proxy requirments and saying that mutual funds have to pass through voting rights would probably bring more responsibility, too.

David

February 8, 2009 7:22 PM

well let see if Obama is really going to make a change in all that
cause the 2008 bonus of wall street is unacceptable and should be returned but they dont care
this 2009 they will do very well too, cause you cut the pay but what about the bonus. dont be a fool some people makes 100k a year in wall strret and 600k in bonus so the pay and the bonus needs to be cut and also based on real performance.

it is sad to see all what is going on an di do hope Obama will do something about it but as history has shown the money and power always prevailed so good luck obama and keep your direction dont let rich and power drives you. you are the president not them.

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