Sometimes it feels like we’re going in circles and anything we try to change gets lost in the rhetoric that inevitably surrounds the process of trying to fix it. Take the recent brouhaha over executive pay, for example. Companies are feeling the pressure to abandon stock options for restricted stock, and further tie senior executive compensation to performance benchmarks like indices. In theory this sounds like a more equitable reward scheme than simply handing the CEO a multi-million dollar bonus when the stock is vastly under-performing. In fact, it may be the only way to gauge what top dogs should take home and determine whether management and the board are behaving ethically.
As Kenneth Feinberg, mutual fund manager with Davis Selected Advisers, told jurors in his testimony at the Dennis Kozlowski trial in early February, ‘When we find managers getting paid a lot for things not related to performance, this is very, very troubling for us; it suggests bad things.’ One need only consider a certain newspaper magnate, who apparently decided to pay himself and his top executives large sums to prevent them from competing with themselves, to see Feinberg’s point.
Still, if pay is tied to corporate performance, won’t senior executives be tempted to manage earnings (and such like) for the short term? And aren’t we trying to move away from this kind of mindset towards a more long-term view of shareholder value creation?
This is where it starts to feel like we’re chasing our tails – because some years ago the capital markets faced the same dilemma, and stock options were offered up as a solution to exuberant executive salaries. Options were seen as a way to ensure management wasn’t out for itself but had a vested interest in the company’s performance. Then, as we all know, lots of CEOs got rich when the stock price moved up. Some got a little too greedy and started manipulating the numbers to cash in their options and buy homes in Palm Springs and Versailles.
Today, we see the embarrassing results of bull-market gluttony. In the US, prosecutors and the SEC are investigating whether Computer Associates used accounting gimmicks to inflate sales and earnings in the late 1990s, for example. What did the company’s top senior executives take home during that period? Between them, they received $1.1 bn in bonuses that were directly linked to the stock’s performance.
So now that we are once again taking seriously the issue of executive pay, one wonders whether we’re painting ourselves into the same corner by tying CEO pay to financial performance. Somewhere in the debate, we seem to have forgotten that the main reason companies are now moving toward restricted stock is because tying managements’ livelihoods to their companies’ performance encourages them to take short-term corporate gain to heart. Or – in this case – to the bank.
