Say on Pay irony

Posted by Marc Hodak on May 10, 2011 under Executive compensation | Be the First to Comment

Larry Ribstein notes a questionable allocation of scarce SEC resources:

The SEC brought in Hu, a widely recognized expert on financial regulation, in response to its embarrassing Madoff failure.  The Reuters article discusses some reservations about how much Hu accomplished, but I want to focus on another issue it covers:  the price of Hu’s services.

The SEC let Hu call Austin home, then paid him to travel between DC and Austin and to stay in temporary housing in Chevy Chase.

The SEC allocated nearly a quarter of its entire travel budget to this one expert.  Furthermore, the amount they paid his university in salary reimbursement and contributions to his benefits exceeded the cap on federal employee salaries for SEC division heads.

The point is not whether or not Hu was worth it.  His SEC commissioners made that determination, and one ought to give them the benefit of the doubt.  I’ve been involved in countless negotiations where getting the “right” guy or gal meant paying all sorts of travel-related expenses that the board considered worth it compared to the value of the services they were expecting to receive.

Ribstein makes the point that when the majority of SEC is looking at similar determinations by corporate boards, they feel that such decisions should be second-guessed by outside shareholders.  He then suggests:

I suppose it’s too much to expect a national referendum on SEC pay.  But shouldn’t we at least give Congress a say on SEC pay?  If anything it’s more justified here, since investors can simply sell or decide not to invest in companies that pay too much, but what’s the taxpayers’ remedy for excesses by the SEC?

Of course, Congress does indirectly, but powerfully, have a say on SEC pay.  I would suggest (and Larry would likely agree) that Congress is all too willing to focus on relatively inconsequential amounts, like the extra hundred thousand that the SEC may have used in their best judgment to attract Dr. Hu, while ignoring the hundred thousand dollars that the government spends every second that they tie themselves up in such deliberations.  In adopting Say on Pay, Congress was merely spreading the fun of second-guessing the immaterial executive awards to institutional investors who are generally poorly equipped to make such distinctions, and should be much more concerned about what they are getting from their managers than what they are giving them.

But if they don’t like what’s going on with their CEO’s pay or policies, investors can cut loose their shares without having to permanently leave the country.