The issue of CEO compensation

I was listening to Elizabeth Warren, a U.S. Senator from Massachusetts, discuss how and why CEOs are overpaid.

 I like Ms. Warren. She is smart, vigilant and has done more about bringing CEO pay-for-performance to the fore than anyone else in America. That’s why it pains me to cross swords with her on this one. She postulates the theory that since the 1990s, “CEO have been compensated almost exclusively through stock, and as such, love buybacks and dividend payments — enriching shareholders at the expense of long-term investment and employees.” She goes on to recommend that the government get involved. Oh boy!

 Let me start by saying the government is the last organization Americans want regulating these issues. The government can’t even balance its own books — why on earth would we want it telling us how to run our businesses? This is not a moral, legal or “in the best interest of the public” issue — it’s a business issue concerning the best use of corporate cash flow and investment dollars. And the last time I checked, enriching shareholders is one of the primary responsibilities of a public company’s CEO.

Another factor Ms. Warren fails to consider is the influence of mutual-fund managers and the advent of the 401K plan. Institutional investors and the 401K plan have done more to promote buybacks, dividend payments and a focus on short-term stock price than CEO pay. When mutual funds and “John Q. Public” started investing significantly in the stock market — coincidently, in the 1990s — shareholder return became the mantra of almost every public company. Interestingly, CEO tenure over Ms. Warren’s timeframe has dropped precipitously from more than 10 years to less than 4. Why? CEOs are on the hot seat and simply responding to the pressures of shareholders and Wall Street.

Compensation might be a factor in CEO decision-making, but job security and shareholder satisfaction are just as powerful. I recommend Ms. Warren spend more time regulating the spending of the U.S. government and let shareholders take care of CEO pay, R&D and cash-flow management.