Executive Compensation Controversy Creates More Unintended Consequences

There is no surer way to create unintended economic consequences than to regulate compensation plans. Connecticut’s Senator Dodd made a last-minute contribution to the stimulus bill that places severe restrictions on executive pay for TARP recipients. As reported in the NY Times Dealbook Blog, one compensation consultant noted, “Any smart executive will (a) pay back TARP money ASAP or (b) get another job.” These new pay rules may well be the single worst part of the flawed stimulus package.

I spoke to an executive, a personal friend, at one bank that had been considering TARP funding. This is a well-managed bank that didn’t need the funds, but thought that it would be prudent to shore up their balance sheet in case the recession lasted longer than they anticipated. This additional capital would give them more flexibility and comfort in lending — indeed, it has been one of the banks in the forefront of making credit available in its area. My source said that at least in part because of the executive pay restrictions, they will now forgo TARP.

Senator Dodd’s restrictions will result in more firms avoiding TARP capital or repaying the TARP sooner than they would have otherwise. At the end of the day, this will mean less lending. More challenging will be the situation for firms which have no choice but to stay with TARP capital. These firms will be forced to either increase their executives’ salaries or provide compensation that falls well below market levels. The former seems politically unfeasible. In the case of the latter, a “brain drain” is likely to result — a terrible outcome considering the taxpayers’ investment in these firms.

What’s the real risk of the flight of executives from these TARP recipients? The common counter-argument has been, “Who will hire these people? They ruined their firms.” This is simplistic and wrong. While CEOs and Risk Management chiefs certainly should bear consequences of their failures, many high-paid executives successfully ran business lines which had no connection to the disastrous choices of their colleagues. A quick perusal of the most highly compensated executives at Bank of America, for example, suggests that perhaps half had absolutely nothing to do with the balance sheet impairment that the corporation acquired courtesy of the purchase of Merrill Lynch. This isn’t to say that their pay shouldn’t be affected by their company’s fortunes. However, the company should certainly be able to have the tools to retain people like, for example, the head of IT, who surely is marketable to any number of corporations.

I’ve argued in a piece on Forbes’ website, that earlier regulations governing executive pay fostered Wall Street’s disastrous bonus culture. Corporate governance expert, Lucian Bebchuk, writes of the risks in the way Dodd’s amendments restrict variable compensation to stock awards. A list of similar examples of problems would go on and on. The bottom line is that companies need flexibility in setting compensation. Federal regulation of compensation is a pathway littered with unintended consequences, and has there ever been a “good” unintended consequence?

Disclosure: some of our clients hold positions in BAC, other financial companies and TARP recipients.

Comments

[grbn:]

agree. the stupidity of some in the federal government will delay the economic recovery and make things worse. change is here.

Feb 19 08:58 AM

[a former re...:]

At the forcast unemployment rate of almost 9% there will not be too many companies ready to hire the "poor" IT guy who had nothing to do with the decision. I suppose he did not get a bonus in other years for decisions that he did not participate in.
If they need and take public money to stay afloat then everyone in the company should suffer especially executives making 800 times lower level pay.....or they can go bankrupt and see what company will hire them then.
This article is just another sour grapes republican who still lives in the land of "greed is good"

Feb 19 09:13 AM

[User 360140:]

Your friend who:

"is an executive, a personal friend, at one bank that had been considering TARP funding. This is a well-managed bank that didn’t need the funds, but thought that it would be prudent to shore up their balance sheet in case the recession lasted longer than they anticipated."

had no business "considering TARP funding" if he didn't need it. This exactly the reason for including the salary cap condition - to prevent greedy executives form dipping into taxpayers (which I hope you are) pockets just to "sure up" their bottom line.

Sounds like the cap is working fine.

Feb 19 11:31 AM

[Gob:]

[Senator Dodd’s restrictions will result in more firms avoiding TARP capital]

That's just fine with Dodd and President Affirmative Action. It frees up more money for ACORN and other assorted criminal groups.

Feb 19 11:32 AM

[wgsalter:]

So your argument is that the hundreds of thousands of employees in our financial services sector should all be blamed and financially penalized for the decisions of the few, AND that the IT executive who can go work for Proctor & Gamble instead of Bank of America should not be able to switch jobs? The brain drain is already on - there are multiple emails every day at the firm I work for announcing departures of senior people for greener pastures. This French Revolution, guillotine-them-all approach may be emotionally satisfying for some, but it does nothing to stabilize organizations we need to succeed for the sake of the country. If one of these bank CEOs quits or gets run over by a truck, do you really think you could get someone qualified to run a Fortune 500 company for $500k a year?


On Feb 19 09:13 AM a former republican wrote:

> At the forcast unemployment rate of almost 9% there will not be too
> many companies ready to hire the "poor" IT guy who had nothing to
> do with the decision. I suppose he did not get a bonus in other years
> for decisions that he did not participate in.
> If they need and take public money to stay afloat then everyone in
> the company should suffer especially executives making 800 times
> lower level pay.....or they can go bankrupt and see what company
> will hire them then.
> This article is just another sour grapes republican who still lives
> in the land of "greed is good"

Feb 19 01:21 PM

[raytayzmd:]

..."“brain drain” is likely to result "????...given the current circumstances, I don't think most of these banks had any "brains" TO drain!...in fact, maybe the best thing would be to "flush" those "brains" into the nearest unemployment cesspool!

Feb 19 03:04 PM

[scorp99cam:]

Companies don't exist to make executives wealthy. They exist to make shareholders wealthy. If the executives would rather stuff their pockets than do what is best for the company, then they should leave. This pity party for executives is rediculous.

Feb 19 03:10 PM

[thispacefor...:]

Let's not kid ourselves, there may be a few superstars who generally are very, very good at what they do and really cannot be replaced without a huge downgrade (maybe/probably not). But on the whole, who are these superbeings walking the earth? And a truly amazing individual's best interest would be to set up shop for themselves. Meaning pay ceiling or not, they are biding their time before bolting.

Feb 19 03:20 PM

[tonyv414:]

The flawed logic in this article is an example of precisely why executive salaries should be severely CURBED. Hopefully the era of "overcompensated incomptetence" will soon be over (in Washington as well as Wall Street). When discussing the capabilities of American corporate management, the term "brain drain" is a bit oxymoronic, don't you think? We should be outsourcing management (corporate and political) to the third world, instead of productive labor.

Feb 19 03:21 PM

[chun12082038:]

yes, I agree what you say, if the executives had to limited they pay, why the senators and the president had to do the same, the president and the senators just like the CEO and Executives in the bid company of AMERICA,they didn't do any good job in the past years also should take the blames, they should also forgo their salaries to say sorry for the peoples now suffer for they also don't do a good job

Feb 19 04:16 PM

[Drgon66:]

One CEO (any American corporation), Corporate salary, 21.7 million per year. if he worked 24 hours per day, 7 days per week, his salary is 2,477.17 per hour.. Seems alot of brain power to me. He has figured out how to not distribute dividends to the stock holders (which by the way are the owners)...He has figured out how to not create a Corp. savings account ( for the owners)to weather hard times. He has secured his future so he has no need to find greener pastures. He has succeded in not spreading the wealth to the shareholders in good times and he has succeded in getting funds from non stockholders (taxpayers, government bailout) during bad times, or through mis-judgement....Prett... smart, I wish I had that much brain power, but really I"d be happy with just one year of executive employment @21.7 million. With all the brain power drain that is going to accure, how about I run your Corporation for 2 million a year, thats only 228.31 per hour...I am not as smart as most CEO's but I will promise to pay my stockholders a fair dividend return on their investment. I will promise that by cutting my salary I will be able to sell our product at a competitive price, I promise to pay our employees a fair wage, so they can buy our product. I promise to create a fair economy that can sustain itself...I promise not to buy my wife a charity ball gown that costs 15,000.00, I promise not to own a summer home in the Hamptons unless my stock holders can be my neighbors. I promise to divide Corporate profit equally per share of stock owned, and all funds not distributed will be placed in a corporate account for future expansion or research and development for future growth of Corporate and shareholder profits. Just by hiring me I have already saved your Corporation 19.7 million, so with that savings, I think the stock holders should get a 15 million dividend distribution and I will place 4.7 million in coporate reserve. But we should probably have a vote, I think the stock holders should have a vote, maybe they would prefer 10 million payed out in dividend and 9.7 million reserved for future growth on their investment. I have trouble understanding where is the brain power in simple economics, so you may not want to hire me.....but here is my theory....on second thought...I'm not going to give you my theory, nothing is free, and it seems the going rate for brain power is 21.7 million.... so if you want the economy fixed make me an offer....what should be common sense goes for around 2 million per year, but I will consider all offers , but I am a patriot so this offer is only to be considered by U.S. stock holders.

Mar 06 03:55 PM

[Drgon66:]

Your exact right...I think if we out sourced corporate heads like they outsource american labor we could save millions of dollars per corporation...the only down side is we would have no jobs in america because we will have out sourced our economy....the economy is really an eco system....simply put "the circle of life"...an eco system can not sustain itself @7.00 minimuim wage verses 21.7 million CEO salary (2,477.16 per hour).
As we turned to a service society @7.00 per hour now we have nobody able to buy the services...we bitch because auto workers make 73.00 an hour, which includes their senior citizens getting health care, somehow we fail to see that corporate heads have been stealing huge salaries from stock holders that should have earned dividends on their investments or at the least these corporate should have invested these inflated salaries in developement of energy saving product that would have in turn created new economies.....but no, thats not what happened...you know what happened, we can not sustain ourselves with no middle class...@ 7.00 per hour, you can't buy a new car, you can't buy a health insurance policy, you will not buy the service of McDonalds, you are unable to pay for the service of a hospital....with out normal paying jobs we are Darfur, a people that were happy with a mattess and a pot, to a wellfare state. Corporate profit is good, but if they to not distribute the wealth in an equal proportion then the eco system will fail....the society will collapse....An eco system can not sustain itself with a diparity of 7.00 per hour verses 2,477.00 per hour....supply and demand dictates that...2,744.00 can not create a demand from 7.00 perhour, they may create a desire, but a demand is unrealistic....and if 2,744.00 has outsourced the 7.00 per hour base, where is the demand.... this is the 2,477.00 per hour brain power of my remembance of 40 years, so I am to old to care anymore about the collapse of an economy....foxes only servive when there are mice to feed opun ...that is the nature of life. America can only sustain its eco system if the dispararity between 7.00 per hour and 2,744.00 per hour is placed opun more equal footing. we no longer have slavery (per say), we no longer have the genicide of a race (indian nation), we no longer have expansion of territory (Mexico, ei Texas)....We have never honored our word ( treaty of 1868), we tried colonialism (phillipines)....Yet we still hear, the patriot cry that there is no labor like american labor....sadly I believe that cry, but I am no longer willing to pay someone 2,744.00 per hour for my beliefs....I will no longer become a stock holder in a corporation that does not distribute the wealth of america fairly. I will not seek health care at 4 times the cost of an insurance company with ppo pricing. I will not buy a car from a corporation that pays its CEO 2,744.00 per hour, I will walk for my food, since I can't walk for my job that has been outsourced to create a corporate CEO windfall. I will pay my taxes on my interest income even though that income is only 2.78 %, while Visa makes usery rates of 21.9% ( they don't seem to reduce that amount) and pays there CEO 2,744.00 per hour. When I was a kid, banks always paid 4.75%, they always said , save your money, the power of compounding....where is the compounding today @2.75% in 12 month CD, its not in the savings I made...Maybe its in the compounding of 7.00 per hour...oh thats right they can't save, they have to servive the moment...sure they could save some, but what would be the point, as some CEO sucks off the compounding. As a circle...the promise of compounding, has become the treaty of1868, just another lie, by Vanderbilt and Rockerfeller and JPMorgan, Seligman, do you want me to go on, its enterprise, if I build a building in New York history will not call me a Robber Baron, they will call me a Captian of Industry, my fortune will not be surrendered just because of illegal monoply laws, I am the law, the strong survive, I give the immegrate Chinese a job and I even give though low life Irish a job, we are building a nation...I may never be called a King, but I am a Captain of Industry and my wealth will be preserved for my desendence even if I was a Robber Baron and broke the laws of a nation.....such is the lie, be proud of your captains of industry, be proud that niggars were only 2/3 of a human being, be proud that we didn't give the right to vote to women till the 20's, be proud that indians were sent on death marches as late as 1930, be proud that japanese americans property was stolen in the 40,s...be proud that we didn't give those niggars any kind of rights to the 60's, be proud that we started exporting well paying jobs in the 70's...All from the premiss that all Men are created equal, unless you are caucasion, then you get 1/3 more humanity, if you are the victor in revolution you are a patriot, if you loss the revolution you are a rebellion (insurgent). Language is great...Twist the language all you might, oh Captians of Industry in your caucasion dream, humanity of all mixes will be king we will eat the mice that the earth supplies, we will servive the captians of industries 2,7440.00 per hour salary, we will eat your young and live in a cave, such is the eco system, so how much is your brain power worth in comprarision to brute force...I say its equal...so if I am worth 73.00 per hour you are worth 73.00 per hour



On Feb 19 03:21 PM tonyv414 wrote:

> The flawed logic in this article is an example of precisely why executive
> salaries should be severely CURBED. Hopefully the era of "overcompensated
> incomptetence" will soon be over (in Washington as well as Wall Street).
> When discussing the capabilities of American corporate management,
> the term "brain drain" is a bit oxymoronic, don't you think? We should
> be outsourcing management (corporate and political) to the third
> world, instead of productive labor.

Mar 06 07:20 PM

[Drgon66:]

They have become self sustaining through the power of law...Corporations were originally granted a charter to do business....corporatio... were good for the building of a country, but as time passed they gained wealth and political power to change the laws for their benefit....Corporation... were formed to do business as there charter allowed.. if they did not perform their charter was revoked.
People invested in charter corporations, say you are willing to invest in the building of a railway from ohio to west virgina for the coal...so you invest in 1898.... 1,000.00 , that was alot of money, but you expected a return....what you did not expect was that Vanderbilt would take a huge salary for his expertise, you believed you would receive a fair share for building America....I would think a fair share would have been 250.00 for a 1,000.00 investment for a year.... but Vanderbilt did not see it that way....he decided to invest in changing the laws regarding charters, a charter was granted to fullfill a task, if they did not fullfill that task the charter was revoked and the charter was only good for the fullfillment of that task...The charter could be revolked at any time, that corp. showed greed or corruption.
The Corporation was formed to build the country, the corporation was granted a charter to do a certain task, be it build a road or be it build a rail road, or be it build a steel mill....beyond that the charter grated no power, but as money begat power, so came the influence of law...Andrew Carniege became a Captian of Industry, but what did the true investors of the steel industry get...if I gave Andrew Carneige 500.00 in 1898, thats alot of money in 1898 would my grandson be ok, would that have been a good investment ( American Steel). So my son let it ride, so my grandson let it ride, what is it worth...Andrew is gone...where is my family wealth...I invested in the countries steel weath....where is my families wealth....I know, I helped build Carneige Hall i know i helped build Rockefellar center by helping to create an illegal mononopy in oil, i know I destroyed mass transportation in america, because whats good for G.M. is good for America. I am proud that that my great-grandfather invested 500.00 in the steel industry in 1898 to create a corporate america that is still not responsable for its obligations...Andrew did ok...invest in America... invest in America. Bill Gates is doing ok....how did you, for your family do with your stock, your owner ship in his company, his corp. You built it..so how you doing, did you get some good dividends for your son or did you just buy a concert hall...I own a piece of Carneige Hall and for 500.00 my Grand Father owns a piece of Rockerfeller center....I should try to collect on his investment.....oh I don't know how , I think it is owned by a company in Japan... I personally bought some stock in LTV, I have to admit it was depressed 14.00 in1994 , my shares were systematally reduced to have no value...LTV is no more, but steel is still a product out of the Cleveland mill in the flats....so where is my return on my investment...there is no return on the investment, you still make steel, your CEO still made a huge salary, but I receive for my investment WHAT....so take your stock in Corporpate lies and stick them...I will no longer buy stock in Andrew Carniege or John D. Rockerfeller or any CEO corporate power that does not pay a fair return on investmest without corporate greed....I as an American citizen expect a fair return on investment without a CEO sucking all profit from the Corp. You want to build....Then You work for me....I am America....You ain't all that smart....I got the money, you need the job, you can take your brain drain and stick it...I want a return on my investment, I want A return on my Grandfathers investment, I want a return on my Great grand fathers investment...what u got MF....change the charter laws....got you a 100 years of luxury you are not king though you have taken stance through law...IN AMERICA all men are created equal so CEO get 's 2,477.00 per hour then the average for a laborer hour... is I DON"T KNOW ...so it would seem that if all men are created equal, then sweeping up cow manure to fertalize a crop of food would be equal to the person (CEO) responcible for the production of foods...we can't all just make food...but we are equal...we want some entertainters as a society, so we pay them as an equal proportion,we like sports so we pay them an equal proportion, we need world politics so we pay them an equal proportation, why is a citizen that shoves shit worth less then a citizen that is able to talk shit.... and that is the answer...there is no difference between shoving shit and talking shit ALL men are CREATED EQUAL So if a CEO is worth 2,477.00 an hour then the worth of the nation is worth the average between 2,477.00 and 7.00 minimuim wage. So so much for Independence....so much for the language of the 4th of July, 1776...you are not free from the King....all you did was the creation a new king.. we will call him King Corporation the holder of Stock, we will invest in the KIng, he wiil create laws to divest us of our profit...he will make the production of food and shelter lesser of value then intellect. Intellect is king, as long as I am King you have no fear....I control your land and you can grow your crops in peace...thats bullshit....I can grow crops depending on the weather....Goverment creates the need for protection...Governmen... creates the need period...all men are created equal....I guess as long as your not a mexican, indian, niggar or a dog... welcome to America ...land of the free...home of the brave...more importantly home of Corp. profit, but a what do you expect from a rum trade based economy in the 1600's from slave production of sugar cane to a working economy.....ship the niggers, make some rum....its cheap....what the hell...... you Bastards....... can go Fuck yourself in the Hampton, we are going to survive...you kingdoms mean less then nothing, we'll create a new kingdom, we seem to need kingdoms.....but I tell you ....my new king has a large house in the Hampton's for summer use, he lives with me....we go together to the Hampton's.....I am an investor investors get nothing.....look at history...history tells the story...if your not the king or the kings self....your his niggar...welcome to Corporate America, we don't spread the wealth, we hord the wealth in an english lie ....its good to be king

On Feb 19 03:10 PM scorp99cam wrote:

> Companies don't exist to make executives wealthy. They exist to make
> shareholders wealthy. If the executives would rather stuff their
> pockets than do what is best for the company, then they should leave.
> This pity party for executives is rediculous.

Mar 07 12:24 AM