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CEO Pay: Finding a Better Way to Hold Management to Account

Big company boards of directors need to recognize their responsibility to shareholders, and adjust how they compensate chief executives.

"Short-term perspectives", begins a recent article* in Lyceum's Perspectives, "increasingly dominate how we think and perform."

Too often, corporate directors dismiss the long-term interests of their companies and their shareholders, as a result.

Even in this tenuous post-financial-crisis world, legislators and regulators still won't acknowledge a dangerous, persistent market distortion. What happened before will likely happen again to the detriment of shareholders:

Did Robert Nardelli's contract terms serve Home Depot's shareholders well when the board offered him $82 million ($20 million due in cash within the first 30 days) if it dismissed him?

Did Carly Fiorina's $21.4 million pre-nup serve her shareholders well?

What about Stanley O'Neal and Merrill Lynch? He steered his shareholders into subprime mortgages in the mid 2000s, and was fired “for cause” in October 2007. Still, he pocketed $94 million.

Did legislators and regulators hold directors responsible in any of these cases? Of course they didn’t.


Priorities," the article continues, "need to shift so that boards and management take long-term perspectives. It's no surprise that the problem exists most prominently in large public companies long absent their founders."

The solution isn't a government mandate or compensation czar, but rather a shift in incentives that allows "old-fashioned entrepreneurship to root itself beyond privately-held enterprises".

And the best way to alter incentives is to alter the tax code to encourage long-term savings and investment, and discourage short-term value destruction.

* Read "Turning Fat Cat CEOs into Long Term Lions" here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.