How do you solve a problem like CEO pay

It's very simple really to most people and that's why its such a complex problem. The problem of executive pay (lets just take CEO pay as a proxy to make it easier to analyse).

For the left, CEOs are greedy bastards who make too much money, when lower level staff in the company can barely make ends meet. Income equality is one the biggest issues facing society. Therefore the answer has to be to curb CEO pay.  Preferably by law. Where is the problem ?

For the right, who is anybody to say what somebody else earns. It's a free market and CEOs perform one of the most difficult jobs of all. When a CEO can increase shareholder value by $10 bn, why should he not get $10 m. Where is the problem ?

In the US, this issue has got into prominence because companies are now required to report how much their Chief Executives make in comparison to the median paid worker. This was opposed tooth and nail by industry, but now the law has come into effect. And the first reports are starting to come in - In Marathon Petroleum it was 935 times, in Del Monte produce it was 1465 times, in Manpower, a temp agency, it was 2483 times. In Berkshire Hathaway it was 2 times.

Governments are starting to act. In the great state of Oregon, where a couple of readers of this blog live, the city of Portland has levied a 10% tax on companies where the ratio is more than 100 times. Many other states and cities are planning a similar levy. I don't think that is right.

Remember, just because something is popular does not make it right. If you held a referendum that the state must burn down the house of every billionaire, it's quite likely to pass with a 75% majority. That won't make it right.

This is not as easy a problem to solve as it seems to the extremists. First to take on the left.

If you extend the same principle to every other domain - no film star should get more than 100 times the salary of an extra. Ditto music star. Ditto sportsman. For that matter why should the mutual fund where your pensions come from, make 100 times more than the janitor who cleans the stock market building. If you sell your property and make a fortune, then of course you shouldn't be doing that as its 100 times more than what the majority of us who have no property to sell are making. We can go on and on. Its been proven time and again  that arbitrary wage equations for everybody will only create a Soviet Union. And why should 100 be some golden number simply because it satisfies somebody's sensibilities.

Now to take on the right. 

Is anybody really worth $98 million ? Really ? That's what Thomas Rutledge took in 2016. The median CEO salary is some $ 11m, but there are also wild outliers. But more than the absolute quantum,  the real problem with executive pay is the reward that even poor performers get. Like golden parachutes if you are sacked. Like pay rises when your company results go down. Like bonuses which don't get returned even though the results are later proved to have been fiddled and overstated. Like backdated stock options. Like saying you have to honour bonus contracts even though your company has just been bailed out by the government.

And then there is certainly the reality that CEO pay has risen far more dramatically in the last 20 years than the pay of others working in the company. It is therefore natural that there is a societal backlash. No society can live with wild inequalities, whatever be the justification.

Companies must be seen to behave sensibly, else regulation is inevitable. A formula could be to more tightly link to company performance, something that's happening anyway. No contractual sweetners that would not be in any other employee's contract. In good years, distribute the bonus pool more widely. Take pay rises only when company performs very well - employees won't grudge your pay rise then. Maybe CEO's can think of contributing 1% to a staff welfare fund. Its all optics. If you not only are fair, but seen to be fair, people won't grudge your pay.

As we began the post, its not an easy problem to solve. So sit back an enjoy how a problem like Maria was solved !

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CEOs sacked for conduct don't deserve severance pay

This blogger has been fascinated with lululemon for some time. The Vancouver based company has been peddling fashion wear for yoga and been successful at it. Firstly this blogger is amazed that you have fashion wear for yoga. Secondly, can a company really be named lululemon ? And spelt without a capital L ? There was also the business of yoga pants that, er, revealed too much, a few years ago. With that sort of pedigree, it is a "must follow" company !

(Wunder Under Hi-Rise 7/8 Tight Full-On Luxtreme 25" for $98.00 USD - Note the price !)

They are in the news again. They fired their CEO yesterday. The gobbledygook announcement they put out said "lululemon expects all employees to exemplify the highest levels of integrity and respect for one another, and Mr. Potdevin fell short of these standards of conduct." In plain English, the Board fired him. He did something wrong, relating to employees, and they fired him. Plain and simple. Nothing earth shattering about that - CEOs are fired for a variety of reasons and this happens all the time. But clearly he was fired, not for poor performance, but for something he should not have done with employee(s), but did. We should not speculate further.

So far nothing spectacular. But what got my goat was also the statement in the announcement that "Potdevin will receive a cash payment of $5 million, including $3.35 million upfront and an additional $1.65m over the next 18 months, according to a separation agreement filed with the Securities and Exchange Commission." This is outrageous. He's guilty of misconduct and you pay him $5 million ? I'm gobsmacked. Yes, there must have been a separation payment in his employment contract. That's standard in almost all CEO contracts. Why CEOs - any employee's contract. You have to be paid a severance pay (however measly it may be) if you are fired.

But this guy is being fired for wrong conduct. Would any low level employee guilty of the same conduct as Mr Potdevin ever be paid a severance pay ? No chance ? Then why should he be paid simply because he was the CEO. If there was an iron clad clause in his contract that said he would be paid no matter what the reasons for firing are, then the guys who drafted such a contract must be fired and made to pay a fine equal to this severance pay.

This sort of action is why companies are hated by the general public. Any corporate action must not only be fair, but be seen to be fair. The Board of lululemon deserves to be fried , roasted and hauled over coals. It is a listed company. What are the shareholders doing ?

CEOs are exactly the same as any other employee of a company. I have no problem with them being paid handsomely for the work they do. But they should not be paid for conduct that necessitates a firing.

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Don't ask for a raise; ask for a drop !

Microsoft's CEO, Satya Nadella got himself into a pickle yesterday. He was asked at a women's forum what women should do to get paid more. He replied "It’s not really about asking for the raise, but knowing and having faith that the system will give you the right raises as you go along,” he said, adding that such patience was “good karma”.

In this politically correct world, he was, of course, asking for trouble. He has been pilloried and the only sensible PR thing to do is to grovel and apologise. Women are paid less than men, in some places (although I challenge anybody to prove this in the IT industry. I know this industry intimately. No sensible company pays women differently from men for the same job. There are less than 50% women in the IT industry, and a lot less in senior echelons,  but that is due to a whole host of other reasons, not unequal pay).

I have no desire to incur the wrath of the politically correct. So I am not going to debate whether Nadella should grovel or not. Instead, if you eliminate the gender factor from the equation, I think he was making a fair point. In fact, I would go a step farther to say that in some instances, we should be asking for a pay drop; not a pay rise !

Labour , and skills, are a commodity, like any other. Price depends on demand and supply. Every commodity's prices go up and down (even gold). Except an individual's salary, which goes only up. Unfortunately , we have been conditioned to expect a salary hike every year and that the more it is the better. Actually, the worst thing that can happen to us is that we get a fat salary hike each year. For, if we keep increasing our "price", a time will soon come when we have become outpriced. At that point, we are sure to be sacked. If collectively everybody in our unit does this, the unit will be shut down and the jobs moved somewhere where the wages are lower (probably overseas). If one is an outlier, then you can be sure that the person would be fired under some pretext or the other and we will be replaced by somebody cheaper. This is the brutal fact of today's workplace.

The trick is therefore to price yourself, just a shade below market. That way, the company cannot afford to sack you. If that means taking a salary drop, then so be it. In fact, as you age beyond 45, I submit, you should be looking to a salary drop every year. There is a far greater age discrimination in the job market than gender discrimination (try getting a new job when you are 50).  The only way you can continue to age and survive without being fired, is to keep your "price" competitive, allowing for the fact that there is a perceived efficiency bias in favour of the young. A small discount to the market is the right place to be in. Unless you are in France, or unless you are in a profession where you cannot be sacked (as one commenter to this blog is).

I know this is heresy and I am going to probably be pilloried. But I would rather hold a lower paying job than no job at all.

Thankfully, I am no Nadella. So I can afford to be politically incorrect !!

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This is why business leaders are reviled

If you behave like this, you deserve to be cursed, reviled, and generally hated. Unfortunately many business leaders are exactly like this, which is why a business tycoon is considered by society as a figure to be loathed. The "this" I refer to is Stephen Elop, Chairman of Nokia being entitled to a $25m payout for the the sale of Nokia's handset business to Microsoft.

Nokia, as everybody knows, has been in dire straits for quite some time. In 2010, the Board fired its existing Finnish leaders and brought Stephen Elop, from Microsoft, as the CEO to "rescue" Nokia. Elop abandoned Nokia's operating system Symbian and tied its fortunes to Microsoft by adopting the Windows platform. It did not work and Nokia has continued to slide. During Mr Elop's tenure, Nokia's market capitalisation fell  by $ 14 bn - that's the amount Nokia's shareholders have lost. Finally Nokia has decided to sell its handest business to Microsoft for under $ 10 bn.

Elop's contract when he joined Nokia, had a change of control clause - that is if some company bought out Nokia, he would be entitled to a payout. This is not unusual in CEO contracts - for if the company is bought out, the first act of the new owners would be to sack the CEO. So the change of control clause and a payment is acceptable.

What is ridiculous is that Elop and Nokia are using this clause to justify the $ 25m payout to him. This is absurd. Elop came from Microsoft; within 1 year of his coming he tied Nokia's fortunes to Microsoft by adopting the Windows platform. Then he orchestrates the deal to sell the business to Microsoft; as part of this deal he returns to Microsoft and is now front runner to succeed the retiring Steve Ballmer as Chief Executive of Microsoft. For doing this he gets a payout of  $ 25 m in addition to the salary he has been drawing for the years he was in Nokia.

There is a huge uproar and even the Prime Minister of Finland has weighed in. No doubt, as the outrage spreads, Nokia will be forced to reconsider and Elop himself might be pressured by public opinion to forgo this payout.

Why do business leaders and companies do such stupid things. Elop is a very bright man by any account. But what he clearly lacks is grace and a sense of right and wrong. He is a rich man and does not "need" this $ 25 m. Wouldn't he have liked to have gone down as a saviour of Nokia - he found a home for its business which otherwise might simply have had to go into bankruptcy. Beyond a point is money so important, or would you like to leave a legacy, earn respect and go down in history as a "good man".

Instead Elop will be remembered as a greedy , money grabbing, no scruples carpetbagger. Whatever he does in Microsoft in the future will forever be tainted. Did not Elop, a career Microsoft veteran learn anything from Bill Gates,a stellar example of how to be rich ?

Why are business leaders like this ? Does greed overwhelm all virtues ?

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The morality of pay

The Church of England has taken a line on executive pay. You may ask what has that body got to do with the world of business. Well , there is the small matter that the Church manages a £ 5.3 bn portfolio and is a shareholder in many companies. And, of course, it is a voice of morality, however much you may agree or disagree with it.

The Church of England has said that it will not vote in favour of executive pay proposals that have bonuses more than 4 times the salary. While its influence as a shareholder might be somewhat limited, its voice has the benefit of a moral argument. Just a little while ago shareholders in HSBC voted to limit bonuses to a maximum of 10 times annual pay.

Readers may pause here to consider the obvious question. Who on earth earns bonuses many times his salary ? This blogger has seen a lot in business. Outside of the financial services industry,  there is virtually no place where an employee can earn 10 times his salary as a bonus. So what's so special about the financial services industry ??

What is special, is that the pay structure for bankers has remained rooted in the past. Years ago, most banking businesses, especially investment banks , were partnerships. Salary at the top tended to be very low, and bonuses were really a form of profit sharing amongst the partners, who were the owners. That's why, until not so long ago, being made a partner in Goldman Sachs was such a big thing. Now, most of these entities are corporates. Senior managers are employees, not owners and therefore have no right to profit sharing. But the old pay structure remained and its entirely the fault of the shareholders that they let it continue.

Its a completely specious argument that such stratospheric pay is a reward for talent and performance and if they don't pay such amounts, talent will go elsewhere. The market for top talent is highly imperfect and is not ruled by price alone. And beyond a certain point Maslow's theory kicks in - there isn't that much of a difference between $25m and $ 30m, although mathematically one is 20% higher than the other. And come to think of it, a little less talent going to finance would be a good thing - some plodders would bring sanity into that insane world of risk taking.

This blogger is of the view that the Church of England is absolutely right in taking the stance it has done. And other shareholders would be wise to follow suit.

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What was he thinking ?

You normally associate business leaders with high intellect, sound judgment, and in general, greater ability than many of us, mere mortals. Then I read this front page report in today's Guardian in the UK.

I had promised to myself that I'd stop writing about either bankers or Goldman Sachs after my last two posts on the subject. But what can you do when somebody makes a speech like that. And where does he chose to make these remarks ? In St Paul's cathedral, no less.

If you know of any greater act of appalling judgement, please let me know.

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The rem conundrum

Every year, the second leg of the soap opera (see previous post for the first leg), is the drama over the increase in remuneration for the employees.

If there is one person, everybody in the company loves to hate, it’s the guy or gal titled “Remuneration Manager”. Many years ago we had a worthy in the company I worked in. It was widely known that he had AIDS (now that was the time when AIDS first surfaced – OK OK I know it was a long time ago). The “news” caught on like wildfire. It became so widely known that the originator of the rumour had to issue a clarification that he meant Annual Increment Deficiency Syndrome !

Some very involved research study is done and the recommendation is made that the average increase should be 3.97%. This goes through at least 27 layers of approval. If it’s a foreign company, it goes right upto the HQ , wherever it is in cuckoo land. Imagine some firang/waiguoren, who can’t point out your country on a map, deciding the rem of Miss Rajalakshmi / Wang Xiao slaving away at the corner.

After 3 months of such approvals process, with fantastic value addition all the way through, the rem increase is reduced to 3.79%. Then some “adjustments” are made to this number for people who are 1 rated, people who joined middle of the year, people who are being promoted, people who were promoted last year, people whose names begin with the letter A ……

Even more intriguing is the process of calculating bonus/variable pay/ incentive (whatever name has been coined for this abomination). I am yet to see an organisation where the formula for calculating bonus is less than 3 pages long and requires a PhD in mathematics to understand. And yet this doesn’t daunt Rajalakshmi or Wang Xiao. She will do intricate research on the equation and point out two ways by which you can get a higher bonus without doing extra work – only for both of them to be plugged at the end of the year by the Rajalakshmi/Wang Xiao equivalent in HR. I am absolutely willing to bet that in any organisation the number of man hours spent on bonuses is more than the number of man hours spent meeting customers.

Why complicate lives all this much. Pay the Rem manager to stay at home. And then adopt Netflix’s approach (see a few posts below)

- All pay is fixed ; no bonus
- Every year your rem is revised to what I have to pay you if you are being freshly hired.

On second thoughts, this may not be a good idea. What would we all moan about then ?

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Who should pay for Medical Insurance ?

It is human to forget about your health when you are healthy. You are young and fighting fit and who wants to think of sickness and hospitals ? May you be blessed to remain that way always. But just in case …..

Its a feature of our times that, God willing, we’ll all live longer. But as we live longer, a variety of old age diseases and disabilities will become inevitable. Medical costs can be one of the biggest liabilities of the future and it is only prudent that we provide for it.

This post argues that employer provided insurance is the worst system that can be. It’s a dinosaur that should be quickly made extinct. Here’s why .

In the good old days, when you joined a company and you retired from it, the employer providing medical cover was a great idea. The employer even provided for cover after your retirement. Perfect. And then came Armageddon. Just look at what happened to General Motors.

This stone age practice has continued. Employers still provide medical cover in countries where there is no public or government cover. This is the situation in the US, India and China. (unlike in the UK where there is National Insurance). And I’m willing to bet most of us are covered by our employers and are sleeping easy. I was covered by my employer too. And I slept easy too. Big Mistake.

The biggest argument against relying on employee cover is what do you do when you retire. That’s when most of your medical expenses might come up. At 60 or so, when you go for cover, you’ll find it either refused, or with a zillion exceptions, or at an outrageous cost. All the years when you were young and had little medical expenses are “lost” – your past employer has taken the benefit in terms of reduced premiums.

What happens when you get sacked ? What happens when you might decide later in life to “do your own thing” ? What happens when your employer goes bust – you’ll find gaping holes in his insurance plans, I ‘m prepared to bet.

I suggest each of us, irrespective of how old we are, and what our employer covers, goes out and buys a private insurance. As early in life as possible. And hope to God that we never have to use it. It’s the best investment we can make.

And to those of us who have children, buy the insurance, the day our darling is born. That’s one of the best gifts we can give the child for the future.

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Et tu Tom ?

Tom Peters is a legend in the business world. He's such a legend that this doesn't even have to be said.

But that doesn’t make him always right. Occasionally, he can be wrong, for he is after all, human. In this instance, I think he is dead wrong.

I refer to his blog post – “I do not wish you harm”. He rails and rants against Robert Diamond, the President of Barclays plc for his “earning” $36.5m consequent to the purchase of Barclays money management business by Blackrock. He objects to the grin on Diamond’s face calling it “appalling – insensitive – stupefying – outrageous – disgusting - sickening in June 2009”. He seems to be objecting to the public spectacle when “thousands are in the process of receiving pink slips”. Read the comments on this post which are even more vitriolic.

Blackrock , a US based money management firm is buying the fund management division (Barclays Global Investors) of Barclays for $ 13.5 bn. Barclays, an UK based bank has been badly hit by the financial crisis like every other bank. So far, it has shunned government help and this sale is a means of raising cash. Barclays staff who own shares in BGI will get a windfall. Diamond himself will get $ 36.5 m. This is what has got Tom’s goat.

Sorry Tom. I don’t grudge Diamond’s payday one bit. This transaction is completely legal and above board. Barclays stands to make a profit of $ 8.8 bn from this deal. Read that again - $ 8.8 bn. I don’t see why a CEO who realized a profit of $ 8.8 bn for his company, should not make $ 36.5 m as a consequence. And do it publicly , with a grin. Why should he be apologetic about it and do so under the table ??

Just like we don’t grudge you your speaking fees which reportedly go upto $ 100,000 per engagement. You are a guru. You have much wisdom. People are ready to pay that amount to listen to you speak. It may sound incredibly excessive for a Somali farmer on the brink of starvation. But that is absolutely irrelevant. I do not grudge your wealth one bit. For you have more than earned it.

The clamour over compensation for business people has gone completely uncontrolled. Where it is “unearned” or gotten by thievery, pelt stones for sure. But where it is earned, applaud it. The world won’t become a better place by pulling down the wealthy. It will become a better place by pulling up the poor. Deng Xiaoping, a great man, said “to be rich is glorious”. That’s what made China, what it is today.

Robert Diamond – I wish you well.

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Astronomical Pay

How would you like a job offer somewhat like this

- guaranteed 5 year contract – you cannot be sacked

- first year wages $ 15.5 m, or $ 43000 every day

- automatic wage increases every year so that the fifth year wages is tripled at $ 48m. That’s a pay hike of 25% per year

- all these wages are irrespective of performance. Doesn’t matter at all how you perform

- you really have to work only 100 days in a year. The real work is only for 90 minutes in those days – but add and subtract getting ready for work, maybe 4 hours

- you are allowed to make money on the side. And the money you make on the side is going to be a multiple of your wages. So much so, that your wages is actually small change. That’s why its called wages; not salary !

- your cost to your company is $ 60m a year

- the government is very kindly helping you out by having a special tax rate of 25% to give you an incentive to come

- your employer is supposed to be a “non profit social trust”


And there is a not a pipsqueak in public outrage. No moralizing on fat cat parasites in the midst of the toiling masses. No sermon from pompous politicians. No “Pay Czar” to examine this package.

Welcome Cristiano Ronaldo to Real Madrid.

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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.

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The AIG Bonus affair

The newslines are awash with reports of AIG paying out bonuses of $165 m, after getting a bailout of $ 170 bn from the US government to stay afloat. Normally, I am of the view that too much noise is being made on executive pay, stemming largely from jealousy, and it doesn't deserve all the attention its getting. But in this case, there is every cause for outrage.

The facts are as follows. These bonuses are retention money's guaranteed to the key executives in AIG's Financial Products Division. For those unfamiliar with the situation, this is the Division that brought AIG to its knees with huge positions built on credit default swaps. When the shit hit the roof, AIG needed these executives to continue with the company to recover whatever could be recovered. They were the only people who probably understood what they did. Hence the retention bonuses.

Ed Libby, the Chairman of AIG has laid out why the bonuses had to be paid in his letter to Tim Geithner, the US Treasury Secretary. In plain English his position is as follows

• He hates these bonuses as well
• He is not getting any
• He and the top 25 executives have committed to draw a salary of $1 for the year
• The company needs these guys in the Financial Products Division
• The bonuses are contractually committed
• AIG will get sued if it doesn't pay and will then have to pay twice the amount
• Hence regretfully it has to be paid, much as everybody dislikes it

AIG is probably legally correct, but wrong in every other aspect in the way its handling this situation. It will get egg on its face. The US government is not going to sit idly and watch this go by, law or not.

With the wonderful advantage of throwing a stone from the outside, my humble suggestion of an alternative way of dealing with the situation is as follows

• Tell the guys in Financial Products Division, it would be complete suicide to pay these amounts, contractual or not
• Tell them , the company values their contribution and will pay 2 times this amount, after the bailout situation has been reversed ; maybe 2 or 3 years from now. Remind them that if the company had gone into Chapter 11, they wouldn't have got anything at all; so this is better than nothing.
• Ask these guys if they would like to voluntarily agree to this. Maybe 50% will and 50% won't.
• Tell those that won't, that the bonuses are cancelled and they can do as they wish.
• Tell them that they would publish their names in the press and that they are welcome to sue. Tell them that they may win, but no serious company would employ them after that.

Public opinion, at the end, is more powerful than the law. After all even the most powerful men on earth are scared of public opinion turning against them.

And AIG may find that its smart employees aren't stupid enough to take on public anger for a million or two in bonuses.

PS - After I wrote this post, I came across an article in the New York Times with the opposite point of view. To read this, click here

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Executive Pay

(cartoon from www. corpwatch.org)

There are few universal truths in business. Here is one however. Everybody believes he should be paid more and everybody else should be paid less. The more senior the "else" is, he should definitely be paid a lot lesser.

A zillion words have been written on executive pay and how excessive it is. Politicians have fallen over themselves to criticise Wall Street "excesses" - this is the "I should be paid more and he should be paid less" syndrome at its best.

In general, I believe there is no such thing as "excessive" executive pay. Talent is a commodity, just like any other commodity. When oil price was $15/barrel, it wasn't "underpriced". When it was $ 150/barrel it wasn't "overpriced". It was just supply and demand working like in any other market - we may not like the outcome, but its still the most efficient pricing mechanism. So must be the case with talent. It will be priced according to demand and supply. If there is a shortage of talent in any field, salaries will go up; if there is a surfeit, salaries will come down. Period.

While this can be true in general, there are situations (especially with very senior management), where a true demand supply situation cannot exist. In such cases pricing is more difficult. Checks and balances can be however constructed ( for eg a truly independent and effective remuneration committee of the Board) to make the process as efficient as possible.

Any legislative cap on executive pay is simply daft. It can never work. Just like price control on commodities can never work - all it will encourage is a thriving black market. The same will be the case with capped executive pay. The only result will be a thriving remuneration consulting industry which will find ways of beating the cap.

The real issue, of course, is the difficulty of linking pay with performance. People are not objecting to the absolute quantum of pay. They are really objecting to what they consider excessive pay when the performance is not "excessive".

There are four broad components of executive pay. One is a fixed component that is both cash and perquisites. This is settled at the time of contract and is rarely the subject of public outcry.

The second, and possibly most controversial component, is the bonus or variable pay. This is usually an annual bonus linked to some targets. In some industries, notably the financial services industry, this has become a monster, with virtually no cap. The problem in this industry is that it started out as a partnership and therefore these "bonuses" were a form of profit sharing amongst partners. When they all became companies with shareholders, they were mistakenly allowed to carry forward this tradition and hence bonuses became many times the amount of fixed compensation. The bonuses were also linked to short term targets (the market should not moan about this as they themselves want companies to show quarterly results and to hell with the long term). All this must change. Bonuses must be capped to say twice the fixed compensation. Targets must be linked to both overall company performance and individual targets. Bonuses should be paid over a three year period - say 10% in Year 1, 40% in Year 2 and 50% in Year 3 just to ensure excessive risk taking over the short term does not happen. These bonuses are payable even if the individual has left the company in Year 2 or 3 - its just that the payment is deferred to ensure that there were no medium term fall outs. Such practices are already common in many industries.

The third component is stock options. In principle this is supposed to align the interests of shareholders and management and is supposed to be a good thing. In practice, the problem has been that managements often fiddle the timing and pricing of the options. So much so, that this has tended to go down in significance as a component of remuneration. My view is that this should be integrated with bonuses into a stock grant. Allow employees to take the bonus in shares or in cash, with a small incentive if he took it in shares. End of story.

The fourth component, and the one I have no sympathy with at all, is compensation for termination. Golden parachutes are the worst. They must simply be abolished. Nothing raises the heckles more than an executive sacked for performance and taking away a massive amount in compensation. I believe there should be no termination payments other than what is paid to any employee - usually x months salary for years of service. There should be nothing more than this and it should be the same for all employees in a company.

At the end of the day, much can be said and written on executive pay. It will all boil down to the values of the company and that of the executive. No amount of rules or policy is going to deter the executive who is just out to maximise his money at the expense of the company. Equally no rules are required for the ethical company and employee who both want a fair wage, but no more. As with all things relating to governance, its ethics that will finally rule; not legislation.

Will the Chief Ethics Officer please rise.

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Wanna earn $ 20m for doing nothing ?

Executive pay is a hot topic these days. Everybody, President Obama included, is railing at the insane bonuses at Wall Street and calling for curbs on executive pay. While you could argue for, or against, it (and I intend to in a future post), here's a non Wall Street example of pay excess, the pundits might want to train their guns on.

Stephon Marbury is the name of this guy. For those of you who are unfamiliar with basketball and the NBA, Marbury is a 32 year old player. Until three days ago he was a player for the New York Knicks. He was twice an All Star , in 2001 and 2003, (that's a sign that you are one of the best players in the NBA) and was twice voted into the All NBA Third Team. He was good in the early part of the decade, but was not amongst the very best. His best days are clearly behind him.

His ego is however sky high and he's had numerous problems with many teams he has played in. This year, his story reached absurd levels; something every basketball fan is very familiar with. He's had a public ongoing row with his team . His team benched him and he then refused to play for his team - yes, r-e-f-u-s-e-d to play for the team. All year, he hasn't played a single game for the Knicks.

However, his contract was water tight - his salary of $ 20.8m per year was fixed irrespective of what happened. Whether he played or not. Whether he was injured or not. So sitting on his backside, he collected collected some $56000 every day !

Sports contracts with top players are notoriously one sided. Fabulous sums of money. Very large fixed component irrespective of whether they play well or not. They continue to get paid if they are injured. Guaranteed fixed salary contracts and they can't be sacked without being paid in full.

Wall Street bankers seem a timid crowd before this lot !

As for Marbury, the Kicks finally paid him two days ago his full salary for the year to just go away. He joined Boston Celtics, the current reigning champions. They are paying him minimum wages.

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