Subject: File No. S7-03-06
From: Frank C Inman, MBA
Affiliation: Fmr. Professor of Economics and Finance

February 7, 2006

Ladies and Gentlemen:

I support better, more easily read disclosure of executive compensation: salaries, stock options, stock grants, perks, pensions and potential spousal pensions. All of these lucrative elements should have realistic dollar estimates and a single annual total dollar figure.

But no one knows whether top executive compensation will grow faster, slower or even fall (my hope) when the truth about leadership pay becomes more clear and widely known. CEOs may just have more information to get compliant board compensation committees to help top executives keep up or surpass their peers in a continuing ratcheting up of compensation at the expense of typical stockholders.

American top executive compensation is by far the highest in the world, while U.S. typical employee compensation is far more competitive. Many, including myself, argue that excessive U.S. executive compensation has been hurting American stock prices in recent years due to executives being paid too high a percentage of past and, in the case of stock options, future profits and stock ownership. Paying top executives so much may also hurt typical employee morale and performance.

Upon stockholders receiving a more true executive compensation picture, at least two great unresolved realities remain to create world leading corporate governance and stock market performance. First, informing investors of top executive pay is a far cry from providing investors with the power to control this pay. Stockholder resolutions to control or limit top executive compensation are usually considered merely precatory or advisory, and companies often ignore resolutions earning more than 50 percent of votes cast. The SEC and/or legislation can easily correct this by requiring publicly traded corporations to adopt any stockholder resolution earning a majority of votes cast.

The second and even larger issue is that most director elections of publicly traded corporations do not require a majority of votes cast by stockholders to elect each director. In fact, usually only one owner need vote only one share to get a director elected as most elections are uncontested. Elections are often uncontested because fighting underperforming entrenched corporate leadership is usually very expensive and/or impractical.

The SEC should easily correct this current plurality voting by mandating that directors earn at least 50 percent of votes cast in elections that only offer "withhold" of votes as an alternative. Directors that lose an election to "withhold" should have to leave their board seats within 12-18 months.

Over the last 25 years, top executive pay has risen much faster than earnings per share and share price, and is taking an increasing share of stockholders' profits. Long term this is unsustainable. This relatively recent shift from owners' capitalism to top managers' capitalism must be reversed, or the American capitalist system will suffer and underperform. In fact, the American stock market has underperformed most major international stock markets over the last several years.

Adam Smith, the father of modern capitalism, warned of the agency problem (managers placing their own interests above owners) about 230 years ago. Owners need the tools to control top managers, and wise SEC action and/or legislation will be required to achieve long term health of the American capitalist system.


Frank Coleman (Cole) Inman
Former Business Professor and Corporate Governance Adviser
600 Cherry Drive #3
Eugene, Oregon 97401-6644
(541) 484-5982