Yes, it’s outrageous

Saturday, 21 March 2009 13:38 by The Lunatic

Like everyone else, I’m completely outraged by the whole AIG bonus issue. Bonuses should reward exceptional performance and positive results.  Where’s the accountability?

This has been hashed to death in the press, so I’m not going to go into all the reasons why it’s just rotten to the core.

But let’s back up a little bit and see how this fits in with the bigger picture of executive compensation.  This has been an issue for many years, well before the economic downturn. It’s a big thorn in the side of many shareholders of large companies.

Executive compensation needs to be tied not only to performance, but also to their own personal risk.  For example – a hired CEO brought in to run an established company has a lot less “skin in the game” than a founder who built the company from scratch, putting his or her own net worth on the line as collateral while the company was in it’s critical growth phase. It really irks me when a CEO is able to name his/her own price, with compensation that is EXCEEDINGLY excessive and not tied to any personal risk ... and sometimes not even to performance.

Ok, admittedly, it does take a certain skill set to be a CEO of a large company.  I’m not denying that.

And everyone LOVES to hate the rich.  But remember, the people that have the skills that it takes to run a large company are also the people that are able to build libraries and hospitals and museums and charitable foundations. Putting these projects together is not easy, and we all benefit from them. Frankly, these are things that our society needs, as well as well run companies.

So I am very much in admiration of people that have the skills, the education, the experience, and the fortitude to be a CEO.  But still – the issue at stake 1) isn’t just CEO’s, it’s the compensation for all levels of upper management, 2) there needs to be actual results to justify compensation above an average “executive” salary, and 3) rewards shouldn’t be handed out without some personal risk or liability.

Many people have advocated a total compensation cap which is some reasonable multiple of the average salary and bonus of all the employees in the entire company – all the way down to the janitors. I would be very much in support of any company that adopted such measures.

Second, stock options should be SOLD to high level management, at no less than a small discount to market prices, and not just given away in whatever quantities the executive can negotiate. If the person has a successful track record to prove they deserve the job, they should be able to afford to BUY their stock options and show they have something at stake.

Third, the system needs to reward LONG TERM performance, over a five or ten year rolling average – not be tied to short term results. 

I don’t think this is too much to ask.  Do you?


Categories:   Economics | Social Issues
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Comments (1) -

June 16. 2009 07:39

Wow, you hit the nail on the head with this one. I like the idea of management buying stock options instead of the company granting them with no personal risk to the executive. Very good thinking.  Great post, thanks.

Bob Jones

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