Thursday, February 05, 2009

Executive Compensation We Can Believe In
The New Yorker's James Surowiecki has a good post on executive compensation in his Balance Sheet blog. This take from the post makes most sense to me:
There is, though, one part of the Obama plan that does seem to me substantive and a useful step toward smarter executive compensation, and that’s the fact that if the bailed-out companies want to pay executives more than half a million dollars a year, they’ll have to pay them them in restricted stock, which means shares that the executives won’t be able to sell until the companies have paid the government back all of the money it invested, with interest. In other words, it’s only if a company performs well over an extended period of time that its executives will be able to collect what’ll amount to a bonus. Performing well for a quarter or even a year won’t do the trick: these executives will have to sustain that performance over time in order to cash out those shares. And this goes at least part way toward remedying what’s probably been the biggest problem on Wall Street, which is the fact that individuals have been able to make huge amounts of money while pursuing strategies that looked good in the short term but were terrible in the long term. A complete remedy to that problem will require companies to be able to claw back bonuses they’ve already paid out and, perhaps, to delay the vesting of stock awards and the like until years after executives retire. But at the very least, it’s good to see Obama recognizing the importance of tying compensation to long-term performance.
Shareholder wealth maximization is a basic principal of capitalism. In recent years, this core value had been replaced by executive wealth maximization. It will be good for stockholders and the overall market to bring back policies that encourage long-term earnings growth.

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