Recommended Reading - Paying Big Bonuses Exposes Wall Street's CEO Succession Failure

Lisa Kasenaar wrote an on-point piece for Bloomberg on the problems associated with high executive compensation at the top banks and the frequent failure for those firms to properly plan for succession. Kasenaar wrote,

The global credit crunch and economic collapse of the past two years exposed pivotal management mistakes at the biggest U.S. banks — from slack risk oversight to multimillion-dollar bonuses for bankers chasing short-term profit.

Lewis’s (refers to Ken Lewis of Bank of America) exit highlights another kind of poor bank stewardship: the failure of CEOs and boards of directors to plan for an orderly succession when it’s time for the top person to leave.

Inadequate planning derails a company’s strategy and destroys employee morale, former executives, investors, recruiters and leadership consultants say. In the past four years, disorganized transitions cracked the foundations under some of the world’s biggest financial institutions, including Citigroup, Merrill Lynch & Co., insurance giant American International Group Inc. and Zurich-based UBS AG.

Anyone interested in compensation or succession planning must read the piece.

Recommended Reading - Why 'say on pay' won't work - Fortune

Colin Barr wrote a fascinating piece for Fortune on why investors, particularly institutional investors, will not restrict top executives’ salaries. According to Barr,

Waiting for investors to slam the brakes on runaway executive pay? Don’t hold your breath. Although Congress may give shareholders more of a say on pay soon, big money managers seem content to keep their mouths shut.

…The biggest investors — institutions such as mutual funds and pension funds that hold more than half of all shares — have shown little interest in playing pay watchdog. And it’s not clear that will change even if the government mandates say on pay as part of the financial reform taking shape in Washington.

“We just haven’t seen a huge amount of effort being put out by institutional shareholders to affect compensation levels,” said Bernard Black, a law professor at the University of Texas. “Whether it’s because they don’t mind the pay practices or because the money managers are making millions themselves, you don’t see them jumping up and down.”

… A recent study co-sponsored by a union pension fund and a top governance firm dubs many of the biggest mutual fund firms — including Ameriprise (AMP, Fortune 500), AllianceBernstein (AB), Barclays (BCS) and MFS — as “pay enablers” for supporting management pay proposals and opposing those by shareholders.

I highly recommend investors and corporate governance specialist read Barr’s piece.

Recommended Reading - Proposal gives shareholders non-binding say on exec-pay, USA Today

The Obama administrations appears to be close to getting its proposal through Congress for a non-binding say over executive compensation in public companies. According to a story by Del Jones, for USA Today,

The Obama administration offered legislation Thursday that would require publicly traded companies to give shareholders a non-binding vote on the compensation of CEOs and other highly paid executives and to vote on exit packages, known as golden parachutes, at the time of a merger or acquisition.

It would appear the Obama administration is working hard to go right down the middle on this issue. While top executives from key associations are adamantly opposed to even non-binding resolutions on executive pay their counterparts such as corporate governance advocates and a number of institutional investors would prefer far greater teeth in the new proposal. At least this is a minor beginning.

Recommended Reading - The Right Way to Pay the CEO of GM, Forbes

Jack Dolmatt-Connell, an executive compensation consultant, wrote a totally on point piece for Forbes on the best way to structure the pay for General Motors’ CEO. Unlike so many CEOs at public companies, Dolmatt-Connell suggests the following (which I wholeheartedly agree with):

The new CEO’s pay should be tied to his or her performance and linked to the company’s recovery, not just awarded to be competitive.

It should be put together the way private-equity-backed firms do it. That is the best model for creating a true risk-reward proposition. It is elegantly simple, featuring modest base salaries and bonuses, significant upside potential via stock options that promote shareholder value creation, little to no downside protection in the form of severance arrangements, and a required personal investment in the company.

Such a pay structure can be easily understood by investors and taxpayers, and it creates a laser-like focus on significantly increasing enterprise value and guiding the company toward becoming a stable, viable and competitive organization that repays the taxpayer. With this plan, shareholders and taxpayers win, but the CEO and executives also win, and potentially win big. If the CEO doesn’t succeed, he or she gets very little, and the taxpayers’ loss is minimized.

The auto companies are not the only firms that should be considering this approach to executive compensation. Let’s hope President Obama’s team considers Dolmatt-Connell’s suggestion on executive compensation. Should GM file for bankruptcy it is imperative a new compensation package be established for all GM executives.

Stay tuned.

Recommended Reading - Banker Pay May Escape Obama Caps As Wall Street Eyes Guidelines, Bloomberg

Christine Harper, Pat Wechsler and Matthew Benjamin wrote a piece today for Bloomberg examining the possibility that the Obama administration may relax the compensation restrictions on the banks that have received TARP money. The restrictions were imposed by Congress after Merrill Lynch executives had received bonuses while the company was floundering and already under purchase from Bank of America. The story quotes Gary Parr, the deputy chairman of Lazard Ltd.,

“It is clear that the government’s going to have to come out with some guidelines on what will compensation be at the big institutions that have TARP,” … “There’s going to need to be something done so that there isn’t a picking off of certain institutions where they’re at a severe disadvantage to others.”

The authors of the story also referred to research by Liberum on turnover in the financial industry and how those numbers might impact Congress’ view on the compensation question. Check out the story if you are interested in executive compensation or the government bailout of the financial industry.

Recommended Reading - Judge Posner Wrote What?, Slate

Eliot Spitzer, you remember him, just wrote a piece for Slate that examined a recent opinion by Richard Posner, a federal judge for the 7th circuit court, on executive compensation. Posner, a well known conservative judge, shocked Spitzer with regard to what he wrote about CEO executive compensation. According to Spitzer,

Posner wrote that there are growing indications that CEO compensation “is excessive because of the feeble incentives of board of directors to police compensation. … Directors are often CEOs of other companies and naturally think that CEOs should be well paid. And often they are picked by the CEO.” He then examined the conflicts inherent in the process of CEO compensation determination, concluding that “[c]ompetition … can’t be counted on to solve the problem because the same structure of incentives operates on all large corporations and similar entities, including mutual funds” [emphasis added].

Anyone interested in the issue of executive compensation should read Spitzer’s piece and check out Judge Posner’s opinion.

For more:

Freakonomics (NYT)

Recommended Reading - Carl Icahn's Take on CEO Compensation for Troubled Financials

Carl Icahn weighed in today on the on-going controversy of CEO compensation. Icahn wrote on his blog today,

We need better corporate governance in this country. We can’t afford the kind of mismanagement that got us into a financial crisis that nearly caused an economic collapse. 

Paulson’s plan is a baby step in reforming executive pay but I have a better idea: why don’t we give shareholders of any bank accepting a government bailout the immediate right to call a special shareholders meeting to elect new board members?

In my view, it was the boards of directors at institutions like Citigroup, Morgan Stanley and Merrill Lynch, Lehman Brothers, Bear Stearns, AIG and others that failed to stop management from pursuing risky strategies that crippled their firms.

Frequently controversial and often times self-serving, Icahn continues to press for major governance related changes at public companies. We will have to wait and see if he can have any kind of impact on the bailout as it relates to executive compensation. 

Stay tuned.  

Recommended Reading -Frustration with executive pay crosses Atlantic

As the financial crisis crossed borders executive compensation began to become an issue in Europe.  While the issue continues to frustrate many in the United States and was peripherally addressed in the recent bailout legislation, the Associated Press wrote a piece yesterday that appeared on MSNBC.  The story focused on how the executive issue is being dealt with in Europe.

Recommended Reading - Bailout Executive-Pay Curbs Use Loophole-Rich Tax Law (Update1)

Ryan J. Donmoyer and Christopher Stern of Bloomberg wrote a story today entitled, Bailout Executive-Pay Curbs Use Loophole-Rich Tax Law.  The piece analyzed the latest iteration of the proposed restrictions on executive compensation.  The story is a worthwhile read if you are concerned with executive compensation, golden parachutes and or their possible limitation.

Another approach checkout Eric Reguly's piece in today's Canada Globe and Mail entitled, The running dogs of compensation. 

Recommended Reading - Footnoted.org's Take On Executive Compensation and Treasury Bailout

Michelle Leder of Footnoted.org wrote an interesting entry in her blog yesterday on the issue of executive compensation.  Her piece was written in light of the impending bailout legislation from the U.S. Treasury and pressure from parts of Congress to impose some form of limitation on executive compensation for financial firms that might participate in the plan.  

I highly recommend the quick read.

For more:

MSNBC (Business Week)

Recommended Reading - U.S. Downturn Boosts Shareholder Activism

Forbes wrote an insightful synopsis of a recent study conducted by Oxford Analytica on the increasing influence of activist shareholders as the U.S. economy and American corporations face a slow down in demand. The article pays particular attention to executive compensation and corporate governance issues.

Recommended Reading - Dutch move to limit big payouts for chief executives

The egalitarian Dutch are the first to try and limit big payouts to executives.  According to a story by Stephen Castle in the International Herald Tribune the Dutch are working on ways to curb executive excess as it relates to money.

... the government is backing an unusual law that takes a first crack at curbing such windfalls. The legislation, drafted by the finance minister, Wouter Bos, was sent to Parliament on Tuesday, where it is expected to pass in time to come into force next year.

"I believe cohesion in society is not served by inexplicable inequalities," Bos said at a recent seminar of center-left politicians, held at a country-house hotel north of London. "Public support for entrepreneurship around the globe is eroded if you let this continue, and this is not in the interests of our economy or entrepreneurship."

If you happen to be interested in executive compensation no matter which side of the argument you are on you should read the article and keep a close eye on how The Netherlands handles the proposed changes.

Executive Compensation

Blogging Stocks has an interesting post on the never ending controversy surrounding executive pay. Worth a read.