Compensation Is the Symptom, Not the Problem

Over the past few days, the compensation issue of senior execs art big finance firms has been front page news. The Obama administration is even appointing a “Comp Tzar.”

I find it amazing that at this late stage of the bailouts, how so few people — still — see the full picture. A perfect example of that is the focus (even obsession) on compensation. This is focusing on the symptom of an unhealthy6 corporate system, and not the underlying disease.

The true problem underlying the comp issue is corporate governance, and the way the Boards of Directors fail to represent the interests of shareholders. The way they systemically engage in the worst form of crony capitalism, transferring wealth from shareholders they are charged with representing to the senior management they are cronies with.

Yet another excerpt from Bailout Nation:

“We’ve come a long way from the days when the man atop the organizational chart made 40 times what the person on the lowest rung earned. Over the past few decades, executive compensation
has exploded, with some CEOs taking 200, 300, even 400 times the base pay at the company.

With so much of this compensation made via options-based incentives, the bosses had every reason to swing for the fences. The upside was all theirs, and the downside was the shareholders’—and taxpayers’.

But don’t for a moment think their terrible track record had a negative impact on their compensation. Despite their performance, these CEOs were paid as if they were enormous successes. The compensation figures that follow are enormous; that they were paid for such abject failure is a national embarrassment.

It is also an indictment of three major corporate governance issues that have not been discussed widely enough. The first is the crony capitalism that was rife in boardrooms across the United States. The cronyismof major corporate boards, especially those in the finance area, has become legendary. Rubber-stamp directors who rarely buck the chairman or challenge the CEO are unfortunately all too common. These boards did not serve either their companies or their shareholders well.

Also enabling this festival of greed are the large institutions that held the companies’ stock, most especially the bigmutual funds that have been AWOL when it comes to policing the senior management. They have the time, expertise, and incentives to do so; it is beyond the capability of individual shareholders. Besides, it makes no economic sense for someone who owns 100 or 1,000 shares of stock to act as overseer and scold to corporate boards. But it was squarely in the interest of owners of 10 million shares and up to do so. Why the mutual fund complexes failed to protect their shareholders is hard to fathom. Perhaps when it comes to the finance sector, they feared missing out on syndicate deals and hot IPOs if they asked too many questions.

Then there are the so-called compensation consultants. They did a horrific disservice to the shareholders as well as the companies. The role of these primarily ethicless weasels was to give cover for these ridiculous compensation packages. I would love to see a review of the packages as written back then. If the compensation experts were members of an actual profession with standards and ethics, they would be drummed out of that profession. Instead, these people were merely tools used by the C-level execs to transfer vast sums of wealth from the shareholders to themselves.