How are the mighty fallen! \(!^{11}\) As we watched the financial firms and businesses fold in near domino fashion following the 2008 financial crisis, we found ourselves wondering what we did or could now do differently that has or will serve to distinguish us from the fallen. By July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act took effect.

American International Group (AIG), granted a bailout from the U.S. government, had, as of the end of October 2008, \$619 million in bonuses scheduled to be paid to its executives and former CEO. The year 2008 was not a good one for AIG; it was headed into bankruptcy until then-Treasury Secretary Henry Paulson agreed to provide a capital infusion. The attorney general of New York extracted an agreement from the company to suspend those payments. The agreement provided that taxpayers had made an involuntary investment in AIG, the company clearly did not, by any measure, perform in a manner that warranted bonuses for its executives, and that there must be different compensation rules when taxpayers are in charge as involuntary stakeholders.
Companies tend to see these compensation packages as contracts between them and their executives and, despite any economic crunch or crash the company experiences, those contracts must be honored. Board members maintain that by paying the compensation packages negotiated, they are simply averting the litigation that would result if the executives' package were suspended. Keeping one's promise is a noble and normative thing to do, but those firms that are beneficiaries of government noblesse oblige should process the contract argument with the following nuances: (1) They have a new set of bosses/board members in the form of taxpayers; (2) if there had been no government support, their firms would not still be standing and, ergo, would be subject to pay recovery limitations of bankruptcy priorities on wages; and (3) there is a great deal of emotional micromanagement of all companies because of increasing job losses (i.e, no income). In short, exceptional times call for exceptions to those contractual bonds and perceived moral obligations on compensation packages.

For those companies not grappling with their new federal investment partners, there are still unresolved compensation issues. Government-mandated limitations on executive compensation have been floating about since the Clinton era limitation of tax deductibility of executive compensation over \(\$ 1\) million. The unintended consequence to that good-intention limitation was the stock option compensation formula, with the resulting abuses there that led to over 200 companies being investigated, the conviction of one CEO, a host of board compensation committee reforms, and new procedures limiting, eliminating, or controlling option grants. The level of executive compensation remains a lightning-rod issue that continues to experience heightened attention. The U.S. House of Representatives' Committee on Oversight and Government Reform has held annual hearings on executive compensation. \({ }^{13}\)
Companies have two choices on compensation packages: (1) They can opt to self-regulate; or (2) they can wait for new regulation to place limitations that could produce further unintended consequences as they add additional compliance costs. Shareholders are also driving controls. For the 2015 proxy season, there were 108 shareholder proposals that dealt with directors nominating their own directors, a means by which shareholders would have more control over the board of directors as well as setting compensation. \({ }^{14}\) In 2012 , there were only 15 such shareholder proposals. There is one additional issue that has been addressed by about half of the S\&P companies. That issue is disclosure of the full relationship between the company and the company's pay consultants. Many of the consulting firms providing companies opinions on the structure and soundness of the companies' executive pay structure are actually retained by those same companies to provide the frameworks for and elements of that pay structure. During one of many congressional hearings on the topic of executive compensation, the evidence showed that 113 of the top Fortune 250 firms had pay consultants \({ }^{15}\) that played dual roles for those companies. The average compensation for consulting services for the compensation firms for their work on structuring pay packages was \(\$ 2.3\) million; the average fees for the compensation firms' work on certifying the soundness of the formulas for the compensation and incentives was \(\$ 220,000\). The evidence also showed that two-thirds of the companies with these extensive relationships with their pay consultants did not disclose the extent of those relationships.
In other words, pay consulting firms are doing what audit firms were doing pre-Enron. The same firms who are offering their imprimatur for the soundness of the companies' practices are the ones that designed those practices. Here, however, the disparity between the consulting services and the certification services is more along the lines of 10:1 as opposed to the audit firms, which were about split evenly between consulting and audit fees. We realized post-Enron that it takes a fairly strong-willed firm that designed a company's internal controls to turn around and say that those internal controls are no good. So it is with pay structure design and pay structure soundness. Those functions must now be performed by separate firms. Presently, the compensation conflicts are where the audit conflicts were pre-Enron. The law requires that companies disclose only the identity of the firm that provides the opinion on the soundness of the companies' compensation packages and formulas. The companies need not disclose the extent of their additional consulting relationships with the certifying firm.............................

Discussion Questions 1. Develop a chart that shows the distinctions between prevalent compensation packages and the new approaches suggested.
2. USA Today had an article that listed several CEOS who made \(\$ 9,000\) per hour. \({ }^{22}\) The CEOs included Starbucks' Howard Schultz, CVS's Larry Merlo, and L Brands' (the parent company of Victoria's Secret) Leslie Wexner. The article ran during a time when the \(\$ 15\) minimum wage debates were erupting all over the United States. What does this type of coverage and article tell you about the importance of executive compensation inside companies as well as in their external relationships?
3. What does the piece discuss about Friedman versus human emotion?