Friday, February 13, 2009

To be consistent, we need (radical) change in execs' compensation

Senior executives are supposed to be dealing with strategic matters most of the time or at least supposed to be exerting major influence on a company's long term. Yet their compensations are structured to reward short term thinking and short term action. In particular bonuses and stock option schemes tend to be attributed and vest much earlier than the time horizon when the results of the execs' work become apparent. How can there be more consistency without additional legislation, regulations and authorities of control? We know none of the really works.

There's clearly something that is profoundly inconsistent in the way executive pay is currently organized and monitored. This needs to be fixed and I don't think it can be achieve through massive regulation and the associated administrative costs. Executives are to blame because they knew, they could not have missed the inconsistencies of the systems and yet they chose to close their eyes, shut their ears and seal their lips, in keeping with the long tradition of their predecessors who got rich by shutting up and maintaining a system broken and corrupted beyond belief.
Of course ultimate responsibility for the situation lies with shareholders since they are the ones who demand constantly "stretch" financial performance, irrespective of economic cycle and investment strategy of the company. This translates into an ever shortening average tenure for CEOs and other execs who are kicked out with crazy golden parachutes... Does anyone seriously believe that this can continue?
To be consistent, from the assertion that executives receive bonuses before the "benefits" of their work can really be appraised, we should also draw the conclusion that the bonuses paid to senior execs of banking corporations over the past decade essentially rewarded the actions and decisions that made the current mess possible. Therefore, they should now be required to return the sums they were given back then as bonuses, not merely be asked to refrain from attributing bonuses and pay increases in the future. There's even a group on Facebook to ask for a clawback of past bonuses; it's led by Roubini and Taleb... In fact, these guys should no longer be in charge of financial institutions. As was rightly pointed out in this program on the BBC World Service on 12-FEB, we need to build a wall between the casino  (exotic finance, hedge funds...) and the utility in order to safeguard the common resources used by the entire economy (payment system, credit system...)
So what should we do?

  1. make all compensations and benefits public and accessible by anyone for all companies that are quoted on a stock exchange

  2. change the structure of senior executives' compensation packages so as to let them receive bonuses for their work on any given year predominantly on the basis of their company's performance 5-7 years down the line

  3. make it mandatory for senior executives to be reporting the changes in their personal and family assets every year in a much more extensive manner than they are currently required to release information on their financial situation

  4. give power to the people by allowing shareholders to scrutinize and question compensation decisions and other key policies and practices of all companies quoted on an exchange. In fact, I would go for tougher requirements of disclosure of management information to all shareholders and stakeholders in a business or other organization

  5. expand the scope of assessment of a company's performance to include the impacts of its decisions on the environment, local communities, key stakeholder groups and other groups directly or indirectly influenced by the company's decisions

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