Friday, 12 June 2009

The Pay Czar

Kenneth Feinberg would rather be called anything else. But the name that is sticking is “the pay czar”. He’s the guy appointed by the Obama administration to oversee pay for the top executives in companies that have received US government bailouts. While his remit is only the companies that have been bailed out, his framework will, no doubt, receive wider consideration amongst all American corporates.

In any other circumstance, we would think the US is actually Stalinist Russia. Governments deciding executive pay in the US ?? Even one year ago, we would have laughed at it. No more. By its own greed and unbelievable tone deafness, corporate America has brought this upon itself.

Feinberg has an impossible job. It would be humanly impossible to state anything on executive pay without the majority disagreeing. But he comes with an impressive background. He was the guy who decided the compensation for individual 9/11 victims, which was accepted without much noise. What can he do here ?

Public opinion in the US, has turned distinctly socialist. Joe Public would like nothing better than to cut the salaries of every executive to a pittance. After all when you are struggling every day and have lost your job, even a salary of half a million to somebody seems wildly excessive. Understandable, but wrong.

Right through corporate history, including in the US itself, whenever governments have decided corporate compensation, it has never worked.

My recommendation, for what it is worth, is as follows

- Let Boards decide executive pay; not government

- Pay packages for the top 1% of the managers must be voted upon by shareholders and the shareholder vote must be binding

- No severance packages for the top1% of executives

- 50 % of all bonuses must be escrowed for 2 years. If a company enters Chapter 11 within those two years this is forfeited

- In the financial services industry, where the problem is particularly acute, the bonus pool would be treated as an “asset” and reserve requirements would apply on this amount

Governments stay out.

What say you ?

For a detailed , but slightly heavy, review of executive pay by the Economist, click here.


Anonymous said...

Hi Ramesh interesting read as usual! :-) Well, the board deciding the executive pay, isn't that the norm? In a way I feel the govt taking this step is good coz they have the bigger picture in mind - rectifying the economy whereas company and shareholder vision may be limited. (Forgive me if my comments sound silly, as I explained earlier I have no business sense yet. :))

Ramesh said...

Hey thoughtful train, that's a very valid comment. Yes, boards have decided in the past, but have been abysmally negligent. Todays Boards would be much more careful and adding a shareholder vote on it is a powerful check - if the shareholders vote down what the Board recommended, many on the Board have to quit. The problem with government setting this, is that its the worst body amongst all others to do so - for it has no choice but to pander to populism.

Anonymous said...

Hmm.. The devil and deep blue sea ... BTW,my name is Ashwini (thoughtful train must be a pain to type) :D

Hang said...

I'm not familiar with this topic. Hopefully, someday I can enjoy a top executive's pay package to get me familiarized with the topic. :)

However, I do think bonuses must be escrowed for a number of years. Once the company goes badly, the bonuses will not go to some top executive's pocket.

Ramesh said...

Hang - Ha Ha. Be careful, in just a short while, you are going to earn the top executive pay package and if you allow the government to set it, it may not be "top" anymore !!!

Preeti Shenoy said...

Had never really thought about this.I went to the link you mentioned and it did make very interesting reading.You made me think!
I am convinced 100% that Governments should not have a pay-say. But one other thing that struck me was Governments always have an eye on that vote bank--therefore much of what they do also is because they have to do 'perception management'.They have to seem as though what they are doing is indeed the greatest and best thing. Don't you think?

Ramesh said...

Yes governments have to do what their voters say. And the popular public opinion will always tend to be anti rich. Hence the danger that governments might do the wrong thing, simply because its "popular".

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