Regular readers will know that I’m a firm subscriber to the Law
of Unintended Consequences, which is also why I try to exercise
consistency in analyzing "dynamic" and not just "static" effects
of a proposal. Clarification: The "static" effect of
Rule X is simply what it says. "Mandate airbags in cars,"
for example. And the static result will be that new cars
will come with airbags.
The "dynamic" effect is how either
people’s behavior (most likely) or the pertinent environment
(less likely, but worth consideration) will change as a result
of the new mandate. With all-but-universal airbags, we now
know that drivers perceive the increased margin of safety
as license to drive faster or otherwise less cautiously (knowing
the consequences of an accident have been, on average, reduced)
with the ultimate result that vehicular injury rates remained
essentially unchanged—while accidents produced less
serious injuries, there were more of them.
A second core, or at least default, belief of mine is that Disclosure
Is A Per Se Good. One reason I gravitated to practicing
securities law is that, conceptually at least, I believe
the (US) securities laws can be summed up as follows: "You
have permission to do anything, so long as you fairly
disclose what you’re doing." (I will not insert any
editorial commentary here about whether Sarbanes-Oxley graffiti’ed
over that pristine canvas, but will leave it to those who
still do securities
law and commentary for a living.)
Which brings us to the SEC’s newly announced initiative to require
complete, thorough-going disclosure of all forms of compensation
to CEO’s and other top corporate officers—and to do so, for
a change, all in one place, that place not to be inscrutable
proxy footnotes.
A value will have to be put on everything from stock options
and the use of corporate jets to Metropolitan Opera tickets,
skyboxes, maid service, and the ugly new duckling on the
block, "gross-up’s" to pay taxes on all these perks. As The
New York Times’ Joseph Nocera puts
it: "All in all,
it’s going to be a pretty sickening sight."
And we’re talking real money here:
"According to Lucian A. Bebchuk, an executive compensation
expert at Harvard, from 2000 to 2003, the total compensation
of the five best-paid officers of all publicly held companies amounted
to 10 percent of corporate earnings."
Ten percent! You can argue methodology
until the cows come home, but whether it was 8 or whether
it was 12, it is to my mind "highly material." And: Ethically
unconscionable, socially divisive, morally corrosive,
economically indefensible, and (by rights) personally humiliating.
Then again, as Graef Crystal, "grand old man of executive
compensation critics," observes, "it turn[s] out that when somebody
is hauling in $200-million, he’s not embarrassable"—even
though the current ratio of CEO pay to that of the average worker
at the same company is 400:1.
Litany of the caveats:
- No one should gainsay true entrepreneurs outlandish wealth: Bill
Gates, Michael Dell, and our own Mayor Mike Bloomberg deserve
everything they’ve got. We need more of them, not fewer. - "It’s a free country," and some combination of shareholders,
Boards of Directors, and institutional investors could
slam on the brakes; the fact that they have yet to do so
suggests at least as an initial proposition that the
competition for top corporate officers is not a completely
malfunctioning marketplace. - And most importantly, it is not the job of the SEC, Congress,
Joe Six-Pack, or yours truly to enforce what might be our
own views of decorous behavior on top executives.
Rather than view with alarm (since the facts speak for themselves),
and rather than propose any reforms or remedies (see bullet
#3, supra), my aim is simply to shed some light on how
we got here.
We got here, largely, by trying to shed light on corporate compensation
practices in the first place.
Remember back in 1993 when Congress eliminated the tax-deductibility
of executive salaries in excess of $1-million? Two things
happened: First, this added rocket fuel to the growth of
stock option grants; but second and even more interestingly,
$1-million/year on the W-2, rather than becoming a ceiling,
became the new floor.
I fear we’re about to re-run the same movie. Under the new
rules, not only will you and I learn that GE is paying for
Jack Welch’s Red Sox tickets, so will every other current
or former CEO. And if history is any guide, anyone in that
club still suffering the indignity of buying MLB tickets
himself will be on the phone to their comp. committee in
about 30 seconds. Full disclosure, meet the law of unintended
consequences.
Now, what has this to do with law firms?
The American Lawyer‘s profits-per-partner ranking, is
what. At this point in the industry’s trajectory, my own
view is that TAL‘s PPP figures (and all their other financial-performance
metrics) are simply a given. Rightly or wrongly, like them
or loathe them, view them as invasions of privacy or refreshing
beams of sunlight, we are living with them: If you don’t
like it, "Get over yourself," as we say in New York.
That does not mean, of course, that they are without consequence. While
the competitive one-upmanship of our friends (and clients)
in the Fortune 500 may be unseemly in the extreme, we are
not immune from jealous glances. Just as corporate compensation
packages will be different before and after mandatory disclosure,
so our profession’s compensation structures are not merely
reflected in the inanimate and passive mirror of the TAL figures: Over
time, that mirror profoundly influences the landscape it
takes in.
