New rules may not slow growth of CEO pay

Capping corporate perks
The new SEC rules would also lower the limit on undisclosed corporate perks for CEOs in still office -- capping them at $10,000 a year, down from $50,000. Those goodies include catered lunches, club memberships, company cars and chauffeurs, private use of company-owned resorts, better health care than the rest of the company’s workers, and, of course, the use of the corporate jet for personal travel.

Yermack says it’s not at all clear that CEOs who are lavished with big paychecks and generous perks do any better than those who are paid more modestly. In one study he found that companies that allow personal use of corporate aircraft tend to underperform the stock market by about 4 percent a year over the 10 years he looked at the data. So disclosure of outsized pay, by itself, will do little to strengthen the link between CEO pay and performance. 

One obvious goal of the rules is to give shareholders a better idea of just how their money is being spent. But full disclosure by all CEOs could also give pause to the the corporate boards of directors that approve CEO pay packages.

“I think the board is really the intended audience of most of this,” said Yermack. “Most boards are very much ignorant of what market practices are, and they rely on consultants who give self-serving presentations,” said Yermack.

Still, the rules will do little to limit the kinds of cozy relationships between CEOs and their boards that have given rise to some of the most controversial pay packages. For that, say experts in corporate government, the SEC needs new rules on how corporate directors are chosen.

There’s also little in the proposed rules to empower shareholders to take action when they believe a CEO is overpaid. The vast majority of corporate directors run unopposed, largely because of the huge expense in mounting a proxy battle to unseat an incumbent board. Rare examples of investor revolt are usually funded by large shareholders like disgruntled institutional money managers or corporate “raiders.” These investors look for companies that they believe are so badly mismanaged they can earn back their investment by ousting management and getting the company back on track.

And don’t expect to see a flurry of CEO pay packages disclosed any time soon. The proposals are just that: the SEC is just beginning a review process that will take months before a vote is taken. If, as expected, the full disclosure will be required in annual proxy statements, those filing won’t happen until March of next year at the earliest. But it remains to be seen how much opposition develops and how hard opponents fight to block the rules.

“These things have a way of getting delayed,” said Yermack. “And if these proposals are controversial enough, they may have to be rethought and the vote could be postponed -- it may take a couple of years.“

Yermack noted that another controversial issue surrounding compensation -- the move to classify stock options as a company expense -- has been debated for 20 years without resolution.

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