Reform May Not Be Swift, but It’s Necessary


Sorry to be so late getting back to you. I got distracted by a fistfight that’s broken out on the New York Times op-ed page.

Your last e-mail overstated our areas of agreement.

1) Yes, I agree, as you put it, that “CEO pay is outrageous on social and ethical grounds.” But:2) No, I never said that raising marginal taxes on high incomes was the best way to tackle this problem. I merely said that raising marginal taxes on high incomes would be a good idea. I’d be in favor of doing so even if CEOs weren’t taking home 350 times what the typical worker earns. The tax system, I believe, should not be a vehicle for confiscating money from people who have too much of it. Rather, it should be a means of funding a government whose competence and breadth best serves its citizens’ needs. The richest people should pay the most, proportionally, only because they have the most to spare.From a redistributive point of view, that may be a distinction without much difference. But I want to be clear about my purpose.3) I don’t agree that reforms in corporate governance will never bring CEO pay under control. I merely sought to separate the question, “Is this a problem?” from “Can it be solved?” By “problem” I don’t mean moral problem, though I think it’s that, too; I mean an economic problem. In other words, is something getting in the way of the smooth functioning of market forces? I believe there is. You believe that if stockholders didn’t want to shower corporate executives in greenbacks with little regard for performance, they wouldn’t do it. I say: Slow down, fella! Give them a little time!

I can’t seem to interest you in a recent study (by W. Gerard Sanders of Brigham Young University and Donald C. Hambrick of Penn State University) that appeared in the Academy of Management Journal. It suggested that CEO pay packages heavily dependent on stock options—probably the most significant factor driving CEO compensation into the stratosphere—were likelier to lower stock prices than to raise them, because they push CEOs into taking too many risks. I mentioned the study in my original discussion of this topic; I mentioned it again in my response to your opening salvo; I mention it a third time here. If stupendous paydays for CEOs really are pushing stock prices down, I have to believe that stockholders (and maybe even corporate boards) will wise up eventually to their folly.

According to Graef Crystal, some companies already are. In a Sept. 5 Blooomberg column, Crystal identified 35 CEOs of large corporations who performed well in 2006 despite receiving relatively modest pay. Relatively is the key word here, since they still averaged $10.8 million; their companies’ average rate of return was 35 percent (“more than double that of the S&P 500 Index”). But it’s a start.

I’ll grant that reform in this area is seldom swift. You probably haven’t spent much time lately in Rock Creek Cemetery (most famous for its Saint-Gaudens memorial to Clover Adams), but if you happen by you might consider taking in the monument that Evelyn Y. Davis, the (still-living) shareholders’ rights advocate, has built for herself. The woman is so worried that no one will remember her when she departs this vale of tears that she’s thrown up three pink slabs with ample room for assorted bizarre addenda (“Recognized at White House press conferences by several presidents since 1978”). This photograph will give you some idea, though it doesn’t show a marble bench and a couple of pink stones lying flat on the ground. All three bear her initials. Davis’ capacious final resting spot is mostly a ghoulish specimen of the particular strain of status anxiety that flourishes in our nation’s capital. But it’s also a sad comment on how little Ms. Davis expects to leave behind. Not for her the epitaph (to paraphrase Christopher Wren’s in St. Paul’s), “If you seek my monument, notice how reasonable CEO compensation has gotten.”

But she’s still plugging away, bless her heart, at 78. We’ve seen you persevere in much more quixotic causes, and at 61 you’re still a relatively young man. So I hope you’ll reconsider, and resume your fight to restore market sanity to the compensation of chief executives.