Thursday, October 05, 2006


Congress Considers CEO Pay Reforms (Maybe)

Forget about Representative Foley and his probable Internet habits. He's not likely to be the only Congressman with his eye focused on porn. Congress is (at long last) peering into the obscene world of executive compensation, and assorted high muckety-mucks are bellowing like wounded buffalos over the injustice of it all. Senator Charles Grassley of Iowa called the latest stock option backdating scandal "disgusting and repulsive", and Senator Max Baucus of Montana shook his head over the Grand-Canyonesque wage divide between executives and workers, crying out, "The gap is too large. It's starting to affect employee morale." Well, duh... It remains to be seen whether this sudden interest in the spectacle of corporate greed is just the election year ploy it appears to be, or if it will really result in any lasting change. Certainly, it is a good sign that Congress finally understands that condemning corporate malfeasance means playing to the crowd.

The Senate Finance Committee is investigating the compensation behavior of at least 100 companies from the entire spectrum of American business, many (if not most) of them major players. A 1993 modification to Section 162(m) of the tax code was enacted to prevent corporations from deducting more than $1 million in CEO compensation - but the law left a gaping loophole. Additional compensation could be deducted as well, so long it was "performance-based". As we all know, "performance" is conceptual Silly Putty in most corporate boardrooms, where even abysmal failure can be likened to the purr of a Rolls-Royce engine at full throttle. At any rate, this change initiated the practice of awarding vast quantities of stock options to executives in lieu of cash, and that practice itself has since mutated into highly questionable activities such as backdating - in which stock options are made available at a price different from the one it had when the options were actually awarded. There is also something else called "springloading", which I've never heard of, but seems to involve a variation of insider trading.

According to Forbes, even if Congress amended the tax code to close up the stock option loophole, that might have little effect on executive compensation. Recent laws requiring more open disclosure of imminent stock option awards and other corporate actions have turned many companies away from the practice. The heyday of the stock options craze was the boom-boom nineties anyway, and that era has long passed. Most companies will probably continue to award ever greater compensation to their executives even if they can't deduct the excess from their tax bills.

The most interesting aspect of this entire imbroglio is the very public indignation of Congress, and what it says about our leaders' changing perception of the public mood.

"U.S. Lawmakers Eye Potential Stock Option Reforms" from Information Week
"Options On The Hill" from Forbes
"Senate Finance Committee Looks At Executive Compensation Increases" from OMB Watch
"Law on executive pay may have backfired" from The Seattle Times

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