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An angry electorate.

This election cycle Americans are angrier than they have been in years. They are frustrated and disenchanted with the establishment and its governments, institutions and elites. They are voicing their anger by turning to "outside" candidates, and those that sound the angriest are doing the best, notably Bernie Sanders, Ted Cruz and Donald Trump.

The roots of this anger have two broad causes: one economic, one cultural. In terms of the latter, many Americans think "their country is being taken away from them." The Republican faithful, for example, are distressed about cultural changes such as the rise of same sex marriage; the Democratic, by the fall of affirmative action. The former cause stems from economic stagnation, which has resulted in painfully little improvement in living standards for most Americans. The typical American family is making only marginally more money than it did in 2000; yet the rich, the top 10% earners in general and the top 1% in particular, have done well, grabbing all the gains from the tepid recovery.

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This vast and increasing disparity in income has led to public outrage, which once again is being fueled in part by big paydays for corporate chieftains. For example, the board of JPMorgan Chase recently announced pay of $27 million for Chairman and CEO Jamie Dimon. This is a 35% increase over his 2014 compensation package, which narrowly received shareholder approval last year. Eye-popping bonuses like Mr. Dimon's are lightning rods drawing the ire of voters who all too well remember Wall Street's bailout and its Fed-fueled recovery.

For over two decades activists, pension fund managers, and governance gurus have called for the overhaul of pay practices, and executive compensation has gotten more transparent, more independently determined, and more performance-based. The vast majority of companies now try to link pay to performance.

There have been some significant reforms in compensation, such as the shift in the mix of pay to more stock-related performance including restricted stock units, or as in the case of JPMorgan, performance share units which are being introduced this year to tie Mr. Dimon's payout to multi-year financial performance goals. As a result, his cash bonus percentage is expected to drop from 40% in 2014 to 20% this year.

Despite attempts to reign in CEO compensation, overall payouts have continued to rocket skyward. Today the typical CEO of a Fortune 500 firm takes down on average $15.5 million. In stark contrast, the average annual income for a family of four has remained stubbornly flat for almost a decade at about $55,000; thus, the average CEO's pay could support 280 American families for a year. Whereas most CEO compensation has soared over the past 15 years, one chief executive's has not budged and remains a relative bargain: President Barack Obama is paid $400,000 a year, and will have earned the median American salary on Feb. 9, the day of the New Hampshire primary.

Executive compensation still seems to better serve top management than shareholders or the American public in general. The size of the payments remains often unjustifiable, and the disparity in the payments remains greatly disproportional. This provides fodder for presidential candidates who rail against corporate fat cats. They recognize that a large portion of the electorate distrusts American institutions, including big corporations. Their outrage is palpable. Boards of directors should take heed of this angry electorate and try to assure an appropriate level of CEO pay.
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Title Annotation:LETTER FROM THE CHAIRMAN
Author:Rock, Robert H.
Publication:Directors & Boards
Date:Jan 1, 2016
Words:574
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