Levitt (Almost) Nails It

Former SEC chairman Arthur Levitt, in his regular feature on Bloomberg Television, nailed it on the issue of executive compensation currently before the Senate–almost. In the early 1990s, Congress passed a law that made executive salaries non-deductible above $1,000,000. The result was two-fold: a higher after-tax cost of executive compensation imposed on shareholders, and a significant expansion in the use of ‘non-cash’ compensation, such as stock options. The current proposal seeks to impose a cap on the deductibility of deferred executive compensation which, like options,has been an increasingly popular tactic for getting around the limited deductibility of cash compensation.

Levitt was appointed by President Clinton in 1993 and his political sympathies are clearly with the Democratic Party, so one might assume that he would be in favor of tightening up compensation controls–but that is apparently not the case. In his interview this morning, Levitt agreed with a judgement attributed to Senator Grassley that the current proposal to regulate deferred compensation is "stupid". Levitt then hit on the critical issue, which is who should have power over executive compensation, and he nailed it by (1) saying that it lies with shareholders, and (2) arguing that boards of directors and compensation committees should submit executive compensation plans to a vote of approval by shareholders.

We give Levitt a qualified "almost nailed it" because he argued that those votes should be non-binding. In our view, this would limit the beneficial impact of compensation votes: boards would still have the freedom to act in opposition to shareholders’ wishes, and given that the election of directors is still very tightly controlled in far too many corporations, boards and executives would be able to remain well insulated from the repercussions of their actions. Looking at this from another perspective, is it possible to make the actions of executives and directors ’non-binding’ upon shareholders? Of course not. Why then should executives and directors continue to be over-insulated from the desires of shareholders?