Eric Dash at the New York Times had a very good piece this morning on a backdoor $500,000 bonus that Denny's gave to its CEO, Nelson Marchioli, by allowing him to buy stock at below the market price. Of course Denny's is free to pay Mr. Marchioli whatever it feels is appropriate, but by making the payment in the form of stock options priced at below market values, it was able to conceal this payment from all but the most vigilant analysts. As the article points out, Denny's is not the only company making such surreptitious payments to its top executives. There are two important points here. First, this sort of surreptitious pay deal demonstrates a continuing problem in corporate governance. Companies are not supposed to be run for the well-being of their CEOs. If the pay could not be disclosed openly, then it is not proper, end of story. It would be reasonable for the laws to mandate that all compensation packages for top executives have to be subject to shareholder approval at regular intervals. This is not government intervention, this is the government setting workable rules for corporate governance, just as it sets rules that ensure equitable treatment for minority shareholders. The second point is that the corruption that allows exorbitant pay for CEOs has ramifications far beyond the money pilfered from corporate coffers. The multi-million dollar pay packages for corporate CEOs set standards that affect pay scales throughout the economy. As a result, we see inflated salaries for high level executives not only in business, but also in government, universities, and even charities. For this reason it is important to redress the imbalance in corporate governance that allows CEOs to get such outsized payments. This topic is addressed at more length in my new book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (coming soon to a website near you). (Angry Bear has corrected me [and the article] on the valuation of the stock options given to Mr. Marchioli. Using the Black-Scholes valuation method, the value of the options is close to $1 million.)
--Dean Baker
