Will 'Say on Pay' Become the New Normal for CEOs?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- With U.S. stocks recently suffering their worst quarter since 2007, European markets in turmoil over Greek debt and unemployment continuing at near-record lows, it's not an easy time to be a CEO.

It's tough to turn quarter-upon-quarter profits in hard times, perhaps tougher still to inspire overextended employees to continually improve efficiency and to retain the confidence of jittery board members. One could argue that corporate CEOs are finally being forced to earn their massive salaries. So, it's ironic that they may be less likely than ever to get them, thanks to a provision in the new Dodd-Frank financial overhaul legislation.

The problem, of course, is that perceived past abuses, especially in the banking sector, triggered massive Congressional and public outrage. In March of 2009, when the stock market hit bottom in the wake of the subprime mortgage debacle, American International Group ( AIG) revealed that it owed more than $165 million in bonuses to employees in the unit that caused the company's collapse. Public resentment flared, politicians responded, and a provision was added to the Dodd-Frank Act that gave shareholders a new "say on pay" over executive compensation.

The public's outrage was not entirely unjustified, and AIG was far from alone. Some CEO compensation packages are so bloated as to apparently defy common sense. For example, The Wall Street Journal reported in March of this year that the top six executives at Fannie Mae and Freddie Mac earned $35 million in 2009 and 2010, citing a report from the inspector general of the Federal Housing Finance Agency. But Fannie and Freddie executives could hardly claim to have a stellar record of success; the two mortgage giants had been taken over by the federal government in 2008, costing American taxpayers $134 billion.

The FHFA stated that executive compensation packages were 40% lower than before the takeover, but the report criticized the government for failing to consider comparable public-sector wages or to independently verify whether the mortgage giants had adequately met certain performance-related compensation targets before approving the generous compensation packages.

Fannie and Freddie aren't alone. In September, a bankruptcy judge authorized Borders Group ( BGP) to make severance payments of $125,000 each -- the maximum payment allowed under the Bankruptcy Code -- to four company executives, including Borders' former CEO, Mike Edwards. That may not seem like much compared to other CEOs' compensation packages, but it was paid after Borders had been slated for liquidation. To the average American worker, paying executives a severance package as a reward for tanking a company defies even the most generous logic.

But then, CEO compensation has ballooned to the point where the average American worker might find it difficult even to imagine. For example, ConocoPhillips ( COP) CEO Jim Mulva reportedly received about $17.9 million in 2010, a 25% increase over the prior year, according to a securities filing cited in the Journal. To put that number in context, the median annual income of American households reportedly continues to hover below $50,000, even when adjusted for inflation. Mr. Mulva is undoubtedly good at his job, but is anyone really 358 times better than everyone else?

CEO pay can become even more troubling when buyouts and mergers come into play. For example, Motorola Mobility's ( MMI) CEO, Sanjay Jha, made a sweet deal when Google Inc. agreed in August to buy the company for $12.5 billion. According to calculations by the Journal and the Hay Group, a management consulting firm, Jha reportedly could earn over $62 million in severance and accelerated vesting of stock options and restricted stock if he leaves Google ( GOOG) in the next two years. Jha may be delighted with the deal, but his employees may not share his enthusiasm if Google lets them go. Looking at Jha's personal benefit from the deal, one could easily conclude that CEOs are being incentivized to wind up and sell their companies, not to shape them into vigorous, sustainable businesses that can offer jobs to millions of unemployed American workers.

Critics of hefty CEO compensation might argue that the Dodd-Frank Act's "say-on-pay" provisions, which allow shareholders to reject inflated executive pay packages, are long overdue. But it appears that CEOs needn't worry too much just yet. Shareholders generally seem supportive of high CEO salaries even when companies are in trouble. The Journal reports that in 2010, before the Dodd-Frank Act became law, shareholders objected to executive compensation at only three of 300 companies that had to offer "say on pay" votes to receive bailout funds or chose to do so voluntarily. Of 2,532 companies reporting on "say on pay" shareholder votes so far this year, including Hewlett-Packard ( HPT) and Stanley Black & Decker ( SWK), only 1.5% of executive compensation packages received a thumbs-down. And, since shareholder votes are non-binding under Dodd-Frank, even corporations whose investors reject executive pay can choose to ignore them.

Still, corporate boards would be wise to listen to frustrated shareholders when executive compensation becomes too generous. "Say on pay" votes may not be binding under Dodd-Frank, but they can serve as fodder for litigation. According to the Journal, shareholders at a handful of companies whose votes failed, including Jacobs Engineering Group ( JEC) and Umpqua Holdings ( UMPQ), sued their boards of directors. In those suits, shareholders alleged that the boards' rejection of their votes amounted to a breach of fiduciary duty.

Boards would also be wise consider the court of public opinion. The Internet gives consumers unprecedented access to information about CEO compensation. There seems to be little evidence thus far that consumers refuse to buy from corporations that overpay their CEOs, but if this issue catches viral fire and the economic slump continues, that could change. At least until the economy improves, CEOs and their boards might be smart to recognize that when it comes to executive compensation, a little discretion might be very good for business.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.