Emphasis on executive compensation and governance policy as the causes of low business investment will be Democratic party policy priorities next year based on a recent op-ed by Vice President Joe Biden coordinated with a policy pronouncement by the liberal think tank Center for American Progress. Both trumpet untenable assertions about the structure of executive compensation and the impact of stock buybacks, among other issues. In a Wall Street Journal op-ed titled How Short-Termism Saps the Economy, Biden states short-termism is connected to "the dramatic growth in executive compensation tied to short-term share price." Yet his facts do not match practice. For example, Biden notes: "In the 1980s, roughly three-fourths of executive pay at S&P 500 companies was in the form of cash salary and bonuses, and the rest in investment options and stock," but by 2008 "only 40% of executive pay was in cash, the bulk being tied to investment options and stock." Salary and annual bonuses, however, have always typically been paid annually and thus tied to short-term performance. Further, over 90% of equity awards at large companies vest over three years or longer, and most are overlapping, meaning that any attempt to profit by taking questionable actions to pump up stock prices may jeopardize two additional cycles of awards. In addition, as our Center On Executive Compensation has shown, buybacks have increased as the result of carefully considered capital allocation strategies and the lack of investment opportunities. Boards are increasingly considering—and adjusting—payouts where they believe there may be a risk, recognizing that some believe executive compensation should include capital allocation decisions. Two days after the Biden op-ed, the Center for American Progress released Five Steps to Address America's Short-Termism Problem, recommending:
- Changing Section 162(m) of the tax code to allow corporate deductions for executive compensation tied to performance realized over 5 to 10 years, or eliminating the deduction altogether;
- Eliminating an exemption from insider trading protections for stock buybacks under rule 10b-18 of the Securities and Exchange Act (as suggested by Senator Tammy Baldwin (D-WI)); and
- Expanding Environmental Social and Governance (ESG) reporting to include "environmental and climate change, tax strategies, political spending, human capital and workforce issues, human rights, and financial stability risks," with human capital disclosures including disclosure of worker training expenses.
