Executive Enrichment Rules Doomed by Naivete: Graef Crystal - 29 June 2009

Executive Enrichment Rules Doomed by Naivete: Graef Crystal

Commentary by Graef Crystal

June 29 (Bloomberg) -- The Obama administration’s plans to
regulate executive pay for companies on the Federal dole is a
decent idea.

Last week, the U.S. Treasury Department went further,
recommending in a report that Congress intervene in the pay
process for every company in the land. “To facilitate greater
communication between shareholders and management over executive
compensation, public companies should include on their proxies a
nonbinding shareholder vote on executive compensation,” the
report states.

Too bad the proposal won’t do a thing to restrain unbridled
corporate compensation gluttony.

The problematic word in that passage is “nonbinding.”

Lawyers call that a precatory resolution, derived from the
Latin precatio, meaning begging, a request or prayer.

This so-called say-on-pay policy is being pushed by the
high priests and priestesses of the corporate governance
movement. Their desire to do good is exceeded only by their
naivete. If a board compensation committee has a record of
giving top executives the moon, what makes you think they will
be cowed by a group of unlettered shareholders, who can only
pray for relief?

The pay proposal isn’t worthless. But it’s not going to fix
a broken system that lavishes unjustified rewards on top
executives at hundred of major U.S. companies, no matter how
well they perform for their true owners, the shareholders.

Ending the abuses will require adopting measures that have
real teeth, not merely gums. Here are my favorites, based on 50
years of studying, and for half those years, designing executive
pay plans:

-- Keep excessively paid chief executives off other
companies’ compensation committees. Someone like Lloyd
Blankfein, CEO of Goldman Sachs Group Inc. who made about $80
million last year, must consider a top executive earning $30
million annually to be a hardship case in need of a little extra
motivation to keep plugging away.

My own research of CEOs who sit on compensation committees
shows that the most highly paid executives award the fattest
packages to the CEOs whose pay they regulate. Here’s an even
better idea: bar CEOs from serving on comp committees.

-- Require true shareholder approval of all pay plans.
Don’t limit approval to stock option plans or free share plans.
Extend it to cover every plan, whether payable in cash or stock,
for the highest-ranking officers in the company. This would be
real, binding approval, not one of those namby-pamby precatory
ones.

-- Fund the CEO’s annual bonus through a shareholder-
approved formula. In other words, take away the discretion of
the comp committee to rationalize huge year-end payouts, e.g.,
by pointing to adverse exogenous events over which the executive
has no control but failing to note those same exogenous events
when they prove helpful to the bottom line.

-- Cap any cash bonus beyond a certain amount, say
somewhere between three and five times base salary and then
drain the remainder into free shares that wouldn’t vest for at
least five years. If things go badly in the future, top
executives will suffer through a reduction in the value of their
shareholdings.

-- Dump stock options as we now know them. Instead, pay the

more...http://www.bloomberg.com/apps/news?pid=20601039&sid=acWw2TXbgq4M