The Wall Street Journal’s running a fascinating story on its front page this morning about how attempts to regulate executive pay have failed, backfired or led to underhanded compensation techniques such as backdating or spring-loading options grants.
A good example of this is the attempt to regulate “golden parachutes”—the payments executives receive in the event of a takeover. These were originally intended to align management interest with shareholders—without them management might oppose takeovers that would benefit shareholders but might result in management being replaced. But when the parachutes got too golden for some, politicians stepped in to try to clamp down on the practice by taxing it. Guess what happened?
In 1983, Bendix Corp. CEO William J. Agee received $3.9 million over five years after his aerospace, auto-parts and machine-tools concern was acquired by Allied Corp., an industrial conglomerate. It was one of the decade's first bruising takeover battles, sparked by Mr. Agee when he tried to buy aerospace and defense firm Martin Marietta Corp. The size of his parachute, as well as the circumstances in which it was paid, created a furor.
The following year, Congress slapped a special tax on golden parachutes. "The Bill Agee Bill," as some at the time dubbed it, taxed awards valued at more than three times an executive's average compensation over the previous five years.
Rather than curbing pay, the law had the opposite effect. Despite a few well-publicized examples, golden parachutes were rare before Congress intervened. In a survey of companies named in either the Fortune 1000 list or the S&P 500 index, a mere 8% gave at least one executive a golden parachute before the law was passed. By taxing parachutes at a certain level, Congress in effect blessed their existence. It also gave the technique a publicity boost.