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The Effects of Restricting Executive Pay

In March 2004, the pension plan of the Utility Workers Union of America proposed changing the corporate bylaws of Dominion Resources, Inc., so that in the future, management had to get shareholder approval of executive pay exceeding $1 million, as well as detailed information about the firm's executive incentive plans. Many unions-most of which have pension funds with huge investments in U.S. companies-are taking similar steps. They point out that, usually, under Internal Revenue Service regulations, corporations can't deduct more than $1 million in pay for any of a company's top five paid executives.

Under the new rules the unions are pushing, boards of directors will no longer be able to approve executive pay above $1 million; instead, shareholders would have to vote on it. In terms of effectively running a company, what do you think are the pros and cons of the unions' recommendations?

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The Union's concerns over excessive executive pay are well founded. As stated, their pension plans' successes are deeply rooted in the overall performance of the firms, and with the utility industry's scandals including Enron, retirees with pensions heavily investment in business are more concerned than ever with the continued operations of these firms.

There are several pros to the proposal. If executive pay is automatically restricted to $1,000,000 annually or less with increases being taken to a vote by the shareholders, the chances of the board financially draining a company are lessened. Also, executive performance will potentially improve as they would have to justify increases in ...

Solution Summary

The solution describes how limiting executive pay can have both positive and negative effects.