In Memory of Peter Drucker: A Challenge to CEO Greed

CEO pay remains the "litmus test" of corporate reform four years after Enron, and despite a temporary downturn, little has changed on that score.
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Show me one encomium to Peter Drucker by any Fortune 500 CEO that even mentions his recommendation that companies pay their top executives no more than 20 times the lowest-paid person in the company!

No, they'd rather that the idea be quietly buried with Mr. Drucker. After all, according to the latest report on CEO excess by the Institute for Policy Studies and United for a Fair Economy, the CEO:Worker pay ratio rocketed back up to 431-to-1 last year.

Yet as Warren Buffett once said, CEO Pay remains the "litmus test" of corporate reform four years after Enron, and despite a temporary downturn, little has changed on that score.

At most companies, compensation issues are being left to corporate boards, which are hiding behind the notion that "independent" directors can objectively assess their CEO's performance. (A lot of good such independence did in the past -- recall that Enron's board was also largely comprised of "independent" directors like the dean of the Stanford Business School.)

In reality, the CEO pay game is a kind of merry-go-round of interlocking boards who hire kiss-up consultants to tell their compensation committees that their CEO is just like every kid in Lake Wobegon -- above average and ergo deserving of above average pay. If you want details, I highly recommend Sam Pizzigatti's Greed and Good. (Full text available here, as well as his weekly newsletter, Too Much.)

Today's executives are increasingly receiving all kinds of "stealth compensation" in the form of pensions, reloaded options, plane junkets, etc. Often it all comes out of the hide of investors. A new study by The Corporate Library suggests that in 2003 the top five executives at each U.S. public company received compensation that on average amounted to 10.3% of their employer's profit, up from 4.8% in 1993.

That's why investors should support a new bill introduced last week by Barney Frank (D-MA). The Protection Against Executive Compensation Abuse Act (HR 4291) would effectively force full disclosure and require shareholder approval of executive pay plans.

The best litmust test of whether or not a bill like this is any good is the reaction it receives from that dubious defender of CEO Greed, The Business Roundtable.

According to the LA Times: "The Business Roundtable, a lobbying group for large companies, said it would oppose the measure -- although spokeswoman Tita Freeman said it hadn't reviewed the proposal carefully enough to articulate why."

That says a lot, doesn't it?

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