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CEOs insist that they are upright citizens who always play by the rules. However, what they hope you don’t realize is that, one, they mostly write the rules that govern their own behavior; two, those rules are so loosely written that they hardly amount to rules at all; and, three, even when they don’t obey the rules, nothing of consequence happens to them. Four-year-olds everywhere would love to play in this world!
Take the matter of shareholder anger over the extravagant bonuses CEOs get, even when the corporation does poorly. To pacify critics, the Securities and Exchange Commission wrote a new rule two years ago requiring corporations to set and publish performance targets that executives must hit in order to get bonuses that can add up to tens of millions of dollars for the head honcho. Good idea!
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How’s that rule working, you ask? Mostly, not at all. You see, the SEC has become more protective of CEOs than shareholders, so it punched-in a little loophole that lets executives keep their performance targets a secret from everyone. A recent survey by a management firm found that less than half of medium-sized corporations are even bothering to comply with the agency’s disclosure rule, and less than 30 percent of large corporations are in compliance.
But even those who do comply are playing games with the ethical intent of the rule. Since the SEC did not provide a standard for performance targets, CEOs are able to write their own. And – big surprise! – they’re setting targets that are easy to hit, guaranteeing they’ll get their fat payouts. As the survey’s author reports, “they are not really earning the bonuses, because the goals are being set so low.”
Shareholders are right – when CEOs flout the disclosure rules about the basis of their pay, they’re hiding something.
“If the Pay Fix Is In, Good Luck Finding it,” The New York Times, September 7, 2008.