New Executive Compensation Approach

Preet Banerjee wrote an interesting article about Sub-Prime CEO compensation. It seems that during 2007 many CEOs were richly compensated for presiding over orgies of loans that would never be paid back. Stockholders of financial companies have been very poorly served.

Now that we know that these CEOs did not deserve their 8-digit compensation during 2007, shareholders would like to get the money back. But, it is too late. Just like the lowly salesman who gets an immediate commission for selling a mortgage whose profitability won’t be known for years, CEOs get their compensation long before we can know for sure that they deserve it.

I have a fix for this problem to suggest to the board of directors of these firms: spread executive compensation out over 5 years. So, each year the CEO would be paid one-fifth of the money earned over each of the last 5 years, continuing after the CEO leaves the company. If a major CEO blunder from a given year comes to light, the compensation tap on that year could be turned off.

For most of the sub-prime CEOs, we know now that they haven’t earned their compensation for years now. They permitted their companies to make massive numbers of unreasonably risky loans. So, if this delayed compensation plan were in place, companies could save 80% of the CEO’s 2007 compensation, 60% from 2006, etc.

Of course, CEOs and other top executives wouldn’t like such a plan, but it is in the interests of shareholders. Decisions about CEO compensation are made by the company’s board of directors who are supposed to represent shareholders. Sadly, many boards just rubber-stamp whatever the CEO wants.

If these sub-prime CEOs knew that the compensation tap would have been turned off if they continued to abdicate their responsibilities, they may have acted differently. This would have slowed the rise of housing prices and softened the fall.

Comments

  1. WhereDoesAllMyMoneyGo.comJuly 22, 2008 at 10:30 AM

    Thanks for the mention MJ! I'll be linking to this post during the lap of the blogs this Friday.

    ReplyDelete

Post a Comment

Popular posts from this blog

Short Takes: InvestorLine’s HISAs, 24-Hour Trading, and more

I recently moved some cash into BMO InvestorLine’s high-interest savings accounts (HISAs) that are structured as mutual funds.  Their designations are BMT104, BMT109, and BMT114, and they purportedly pay 4.35% annual interest (which they can change whenever they like).  However, the way they report the monthly interest payments is so baffling that I wasn’t able to sort it out in my first 15 minutes of trying.  A further complication is the following text in the HISA description: “The Bank may pay, monthly or quarterly, compensation to your Dealer at an annual rate of up to 0.25% of the daily closing balance in the BMO HISA.”  I couldn’t find any evidence of such a charge, but I haven’t been invested for a full quarter, and I can’t yet say that such a charge isn’t buried somehow in the confusing reporting.  I have more digging to do before I can recommend these HISAs. Here are some short takes and some weekend reading: Preet Banerjee explains the dangers of Robi...
Read more

My Asset Allocation

I’ve resisted discussing my asset allocation for some time, but now is finally the time to describe it and the reasons behind it. I’m not holding it out as a model portfolio; I believe it’s suitable for me and not necessarily anyone else. With that warning, enjoy the discussion and feel free to ask questions or take some pot-shots. The main reason why I haven’t discussed my asset allocation in detail before now is that I don’t want readers to treat it like a model portfolio and follow it blindly. Everyone’s situation is different. The need for variation in asset allocation from one investor to the next usually isn’t huge, but there is no one-size-fits-all portfolio. A secondary reason for keeping my asset allocation to myself is that I can’t be sure I’ll never change it. For example, I recently made the minor change of switching from an ETF of small-cap stocks to an ETF of small-cap value stocks . I don’t have any plans to change my current allocation, but I may think differe...
Read more

Updated Currency Exchange Method at BMO InvestorLine

There is now a more recent update of the method I use for exchanging currency at BMO OnvestorLine . I recently changed the procedure I use to convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system. The latest change I made eliminated an annoying interest charge that I had to ask to be reversed. Most people don’t realize how expensive it can be to exchange currency. The extra charge banks and brokerages add gets hidden in the exchange rate. To see this extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars. Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per excha...
Read more

Archive

Show more