Wildhawk

An Open Letter to Kenneth Feinberg (and American Taxpayers)

Please tell me why the argument that Mr. Hall deserves to get nothing because without government intervention C would have gone bankrupt, effectively invalidating the contract, is "inane drivel"? That's is absolutely what would have happened had the government not stepped in with bailout funds. The simply fact that Mr. Hall has his current job at all is due to government funds.

I'm as much (maybe more) a proponent of ensuring the sanctity of contract law as the next guy, but the argument of paying him in order to uphold contract law rings hollow when he shouldn't have an enforcable and contractual right to a job at all right now, much less a $100 million bonus. If we are so concerned about upholding contract law, we never should have stepped in with the bailouts to begin with.

And speaking as a compensation consultant, the fact that Mr. Hall has a contract that even allows for such outlandish upside potential is mind-numbingly anti-social and creates incentives to do nothing other than take spectacular risk for personal gain with all the downside taken on by shareholders if he fails (or in this case, taxpayers). If I were a shareholder, I'd be livid at this kind of compensation arrangement, only because there appear to be no safeguards in place to protect the very existence of the company if he fails (remember, there is no shortage of high profile banks going out of existence in the recent past because of "rogue traders", e.g. Barrings). I don't begrudge someone making huge profits if they deliver shareholder value, but without clawbacks or offsets in the contract for losses/failure, Mr. Hall's natural incentive is to take as much risk as possible in order to reap the greatest personal reward possible, with little or no downside if he fails.

Unfortunately, this type of compensation structure is largely the norm on Wall Street, and the biggest reason why so many banks blew up and needed taxpayer funding to begin with.

10 Highest Paid CEOs for 2008: Unbelievable

MMarrkk- your comment about the BOD being voted out in the next election doesn't hold water. Over 50% (and I believe the number is something like 70%) of shares are held either by institutions directly or indirectly on behalf of shareholders, rather than by individual shareholders themselves. Those institutions vote proxies in favor of management in virtually all cases, unless explicitly instructed otherwise by attentive individual shareholders.

So why are shareholders letting the institutions vote their proxies for them? Because most individual investors don't have the foggiest notion of how to read a 10-K or a 144A (proxy statement), and so couldn't even begin to tell you what the senior management teams of the companies they own make each year, much less what metrics those execs are paid on. Call it laziness, call it ignorance, call it what you will, but BODs don't get voted out because shareholders don't take the time to read disclosures or have the skill set to interpret those disclosures without it being spoonfed to them by the mainstream media. Even then, most have no idea that they even have an ability to vote on it, and when they do, virtually none of those votes are binding to the company (see all the drama and discussion around "say on pay" proposals, which also wouldn't be binding to companies).

Our current regulatory framework isn't in place to make this stuff easily accessible and understandable to the individual shareholder; it's set up to cater to ramming through whatever BODs want to do with a minimum of supervision and consequences from the true owners of the companies. Heads they win, tails we lose.

Not every company acts this way, but the ones that don't are the exception, not the rule.

I still think the solution to all of this is to institute fiduciary responsibility for everyone who handles the money or financial assets of others as an intermediary (it basically requires financial intermediaries of any kind to follow the "prudent person" rule, and to always act in the best interests of the end client). That would include C-level execs and BODs. I venture to say you wouldn't see this sort of negligence and recklessness from BODs and management teams if the consequences of their decisions could result in jail time. Incentives just would not be this out of whack if the decision makers might go to jail as a result.