Executive Compensation: How To Fix It, And How Not To

Arthur F. Woodard,
07.15.09, 04:54 PM EDT

Most of the solutions being proposed are wrong.

The recent public outcry over "excessive" executive compensation
seems to have coalesced into nearly universal agreement that
fundamental change is needed to curb abuses, and that the change must
come from the government or shareholders, not corporate America. Change
almost certainly is necessary, but the real question is whether some of
the draconian cures suggested so far--legal pay caps, confiscatory tax
rates, special masters and so on--may be even more destructive to
shareholders than the disease has been.

It is almost shocking
that during the 2009 proxy season most public companies either stood
pat or only tinkered around the edges of their compensation programs. A
continuation of such timidity is certain to result in the imposition of
one or more of those harsh measures. Time is running out, and companies
should be taking the initiative to adopt changes--the right kinds of
changes.

First, what should they and Congress not be doing?

Name-calling
and cries for measures that punish executives have unquestionably
played well to an outraged public. Before acting on its rhetoric,
however, Congress should look to its track record in attempting to
control executive compensation legislatively. It has been at best
dismal. It can in fact be argued that a primary accelerant of the
explosion in compensation was Congress' 1993 decision to make
compensation that wasn't "performance based" and exceeded $1 million
nondeductible by public companies.

What Congress failed to anticipate was that companies would evade that restriction by making ever bigger awards of stock options
and other performance-based compensation, leading to huge paydays for
many executives. A more recent congressional initiative that seems to
be backfiring is the cap on compensation imposed on executives of
institutions that accept loans from the Troubled Asset Relief Program.
The apparent primary consequence of that action has been to motivate
those institutions to repay their funds as fast as possible, perhaps
without giving full consideration to the long-term effect of doing so.

The
reaction of executives to a broad-based cap is equally predictable.
Those who can will move to either a non-U.S. company or to an American
company not subject to the restriction. Those who can't move will reduce

more...http://www.forbes.com/2009/07/15/executive-compensation-fix-leadership-governance-policy.html