Before you jump down my throat, I've got three points with this post. America runs in cycles, and I agree that the comp for the top CEO's in the land is out of hand. But the notion that we need to limit CEO pay is a little offputting to me as well, mainly because I don't know how you accomplish that and still keep capitalism cooking.
More hands than I thought...damn...
Anyway, back to the post - three points on CEO and other C-level pay.
1. A lot of execs had personal stakes in the companies they served that have evaporated in the recession.
2. Japan has a system where execs earn less, and it's riddled by issues of accountability.
3. I'm back to the bonus bank concept for all things incentive pay. Why not hold a portion of all incentive pay pending company results for at least a three year period? Not perfect, but allows top execs to get paid for sustainable growth if you could figure it out and would limit crazy, shortsighted decisions that impact the near term only.
The first point is an acknowledgment that in all the hubbub about CEO pay, there is a class of executives that has been asked or required to put down their own money in ownership stakes in the company they work for, and those stakes now often look worse than your 401k. From CFO Magazine:
In October 2007, Steven Crane aimed to align himself with shareholders in a big way. The CFO of ModusLink Global Solutions bought 10,000 shares of company stock at $13.80 a share. If the decision made him a better CFO, as management gurus would assert, he is certainly the poorer for it now. As of early January, the stock was trading at about $3.50 a share. On paper, the 75 percent drop in value drained $103,000 from Crane's net worth — about a quarter of his salary. That bad news came just as ModusLink suspended executive bonuses.
Crane is far from alone. Among public companies, about 135 finance chiefs have invested more than $100,000 in company stock in single transactions since September 2007. As 2009 began, about 100 of them faced real losses on those purchases, according to CFO magazine's analysis of data supplied by InsiderScore. American Express CFO Daniel Henry has lost $686,000 of the $1.1 million he put into company stock in November 2007, soon after becoming CFO. David Wolf, CFO of Berry Petroleum, bought five times in 2008, with an average paper loss of 43 percent on his $581,579 investment as of early January.
That's going to leave a mark, just like your 401k.
What about Japanese CEO's? Can we model that? Probably not. More on the Japanese CEO from BusinessWeek:
"In recent weeks, the news from Japan Inc. has been a steady drumbeat of layoffs, plant shutdowns, and gloomy earnings forecasts. Yet few CEOs have been shown the door. And there are scant signs that the public and political outcry against CEOs' fat pay packages in the U.S. will be echoed in Japan.
That's because most Japanese chief executives don't earn anywhere near the big paychecks of their Western counterparts. CEOs at Japan's top 100 companies by market capitalization earned an average of around $1.5 million, compared with $13.3 million for American CEOs and $6.6 million for European chief execs at companies with revenues of higher than $10 billion, according to an analysis of 2004-06 data by Towers Perrin, a Stamford (Conn.) human resources firm.
Is it time for Americans, then, to imitate the Japanese? Executive compensation experts wouldn't advise it. Japan's system is hardly ideal, they say. In fact, many Western investors argue that Japanese executives get paid too little and that performance should be a bigger factor in determining compensation packages. On average, only about a third of Japanese executives' income comes from stock-option grants (which weren't possible until deregulation in the late 1990s) and bonuses linked to financial metrics such as return on equity and revenue growth, says Naohiko Abe, head of Towers Perrin's Japan office.
Contrast that with the U.S., where the ratio is around 80%, and Europe, where it's 60% to 70%. "If they're not paid enough, they feel that they can't be blamed for bad performance," says Barclays Global Investors strategist Takaaki Eguchi. "As investors, we want a system where they're sufficiently paid but also take full responsibility for what they've done."
Which brings me back to the concept of bonus banks. Let's keep incenting executives through various forms of incentive pay (bonus, stock, options, etc.), but keep a portion of the annual payout in a bonus bank (Al Gore would call it a lockbox), payable after three years, only if the growth was sustainable. I know you have to figure out how to measure the results, whether growth was sustainable, etc.
Still, if the call for a bonus bank "lockbox" can't bring democrats and republicans together on the topic of executive pay, what could?