Wednesday, June 10, 2009

Government To Assume Role In Setting Executive Compensation

Last week in a blog on this website I observed that executive compensation would be the government's stalking horse -- the example of corporate excess that will justify everything from government's micro-regulation to the takeover of entire industries, and even to making of ultimate determinations of who succeeds and who fails.

It is a sad day for the free market in America and ironically it was not the free market that resulted in the corporate compensation obscenities that is the poster child to justify invasive regulation of corporate America. Rather, it was the substitution of the good old boy network for the free market and the absence of transparency that bastardized market setting mechanisms for executive compensation that results in the news that follows, from today's Bloomberg:

The Obama administration will seek new powers for the Securities and Exchange Commission to force firms to let shareholders vote on executive pay and make directors who set compensation more independent, an administration official said.

Today’s proposal, subject to congressional approval, would cover all public companies. President Barack Obama has long supported giving shareholders nonbinding votes on bonuses, salaries and severance packages. The administration also will name a “special master” to monitor compensation plans for firms receiving exceptional assistance in the financial rescue.

The changes are aimed at reducing systemic risks and quelling a political uproar over bonuses paid to executives whose companies were bailed out by the government. Treasury Secretary Timothy Geithner has repeatedly blamed pay standards tied to short-term profits for contributing to the worst financial crisis since the 1930s.

“It clearly is going to force companies to be more transparent with their disclosure” on compensation, said Irv Becker, national practice leader for Philadelphia-based Hay Group’s executive compensation practice. If the measure is implemented, it likely will take several years before shareholders begin to confront management, he predicted.

“It’ll kind of be novel the first year, maybe the first two, and then likely be a little bit more serious in future years,” said Becker, a former head of compensation and benefits at Goldman Sachs Group Inc.

Thursday, June 04, 2009

The Culprit In The Socialization of America

Several years ago I gave a speech to an industry association. In it I posited that the absence of serious, independent corporate governance had resulted in inflated executive compensation and that one day corporate America would pay a severe price for not policing itself.

The speech was not well-received.

Under the heading of "I told you so," we now see the price that has been exacted due to companies existing for the benefit of their officers and upper management rather than for their shareholders. Had boards of directors done their job and paid based on performance and paid based on market, executives would make far less than they do today and would not have made themselves such obvious targets for the class war that has begun in America. Moreover, we would not face the socialization of industry that exists today.

We would not be allowing the government to take control of entire industries and interfere with impugnity the market process of determining compensation at the executive level. Had the market, not the good old boy network, determined executive comepensation all along, just as companies determine the compensation of low-level employees, those who wish to empower government to destroy the free market system would not have the executive compensation banner to raise as evidence that the market doesn't work.

Of course, the problem was never the market. The market was never allowed to work when it came to executive compensation. Regretably, just as my argument years ago did not resonate, neither will this argument if only because the General Public wants to punish corporate America for its excesses, even if it means putting a bullet in the back of the free market.

Corporate America has a lot of work to do to regain a modicum of credibility. They can begin by appointing truly independent boards of directors who hold executive management to high standards, pay based on results delivered, and pay the least, not the most, they can justify in base compensation to garner the talent they need to succeed.