Thursday, June 11, 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.