Why We Need to Limit Executive Compensation

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(Incidentally, in 1971 my first boss out of business school, who was then easily one of the nation's top half-dozen public company CEOs, made 10 times my starting salary of $15,600 and about 15 times the salary of our average employee. And throughout the remainder of his exceptional career, I don't think that ratio ever exceeded 20 times, which was a great example to me as I started my own career. Although I have started several companies and engineered several major mergers that have rewarded me generously, my own compensation since I started my career has, with the exception of two and a half years when I received share-price increase-based bonuses, always stayed in that same range.)

The disparity in compensation today is an ethical embarrassment to our country, and it is certainly an affront to workers and to shareholders. When polled, 90% of institutional investors said they thought corporate executives were dramatically overpaid, and 85% of them said the prevalent executive compensation system hurts Corporate America's image, according to a Watson Wyatt Survey published on June 20, 2006.

With the ills of our broken executive compensation system rippling through so many of the critical economy-related issues that the next President and Congress need to address, Congress should step forward early in 2009 to play a proactive role in fixing the system and reestablishing its fairness.

Congressional Mandate

First, Congress should immediately grant public shareholders the rights, on their own, to call a shareholders' meeting to vote out the current board and to render an advisory vote on executive compensation—rights that they don't currently have. Much better than any other similar measures contemplated or previously adopted, these three rights, which are already in place and working well in Britain, would align shareholder and management interests as to both governance and executive compensation.

Second, Congress should establish a ceiling for individual executive compensation as a reasonable multiple of average employee compensation, and penalize through the corporate income tax code and/or otherwise those companies that elect to pay in excess of that multiple.

Third, Congress should close the loopholes that currently allow the wealthiest Americans to use offshore tax schemes that cost our Treasury $70 billion in taxes each year, and it should aggressively step up tax enforcement to capture the 30% or so of earnings from selling investments that currently goes unreported each year.

Fourth, Congress should tax the "carried interest" now being earned by private equity and hedge fund managers at the ordinary-income tax rate of around 35%, rather than at the much lower capital gains tax rate of 15%. Carried interest is just a form of performance fee, and like every other performance fee or bonus it should be taxed as ordinary income—otherwise it is just another example of excessive and unfair executive compensation.

And fifth, Congress should continue to oversee the compensation practices of any entity that has or relies on federal government guarantees. To this point, particular compliments should go already to those in Congress and to the New York State Attorney General for their efforts to recover the excess compensation that recently went or is still scheduled to go to AIG (AIG) executives.

If Congress enacts these five measures, then many of the oppressive breakdowns in our economy will be mitigated—from the grossly un-progressive tax outcomes to the insensitive employee practices to the larger than necessary trade and federal deficits. And the fairer and more balanced sense of corporate responsibility which so honorably distinguished our country for most of the 20th century will be restored.

Leo Hindery Jr. chairs the Smart Globalization Initiative at the New America Foundation and is managing partner of a New York media industry private equity fund. Previously, he was CEO of AT&T Broadband and its predecessor, Tele-Communications (TCI). He is the author of It Takes a CEO: It's Time to Lead With Integrity (Free Press, 2005).