Use executive pay to help pick stocks

Compensation for top executives is way out of control, not just on Wall Street but at most American corporations (not to mention baseball teams).

The U.S. has the greatest differential between CEO and worker pay, and the gap has been constantly widening. In 1965, the average CEO made 24 times the salary of the average worker. In 2005, the gap soared to 262 times.
What can we do about it as citizens and investors?


Let's start with a heads we win, tails we leave version of capitalism. In this system, managers are incentivized to take undo risks to make the most profit in the shortest time.

If they are right, they make scads of money. If they are wrong, they get fired or leave for another job. If they are very wrong, as they were at AIG, the taxpayers bail them out.

There are two ways to control this. First, companies should pay salaries and bonuses that top $1 million over a three-year period.

Each year, the employee could collect and pay taxes on one-third of the bonuses from each of the previous years. If there is accounting fraud, the companies could take back the money. If the compensation was paid in stock, the employee would be that much more invested in the success of the company. If the company failed, the employee would lose.

In addition, we should raise the tax rate for each additional dollar of income for compensation topping $2 million. In the 1950s and '60s, the marginal tax rate was often 90% or more, and people did not stop working.

Do you think A-Rod would stop kissing himself in the mirror if Uncle Sam grabbed more of the Steinbrenners' largesse?

The compensation system in major corporations is broken because corporate governance is broken.

The solution to this problem is easy. Independent shareholders should have the right to elect 20% of all members of a board of directors. These directors should run the compensation committee, giving outside shareholders a strong voice in management compensation that should limit excesses.

As investors, you should always look at the compensation of management before buying a stock. Compensation is detailed in the company's official filings with the Securities and Exchange Commission and is available at Companies that pay execs exorbitant salaries and options are often accidents waiting to happen. If the CEO is making tens of millions, you probably should avoid the stock.

Investors should also look at buying and selling of company stock by corporate insiders.

People who get lots of stock options tend to dump their shares when they think their stocks are getting expensive. They will tell you they are selling to diversify, give money to charity or build a house. But however they say it, they are selling, and you do not want to be buying, at least not then.

We have an uncontrolled epidemic of greed in which senior managers often believe they are entitled to compensation normally seen only in feudal times.

As citizens, we should urge our officials to take measured steps to limit the excesses.

As investors, we should avoid companies that are the worst offenders.


Your Money columnist Peter Siris is an investment manager at Guerrilla Capital in Manhattan.