ITYS Alert: Executive Compensation

Lately, I find myself trying to think of gentlemanly ways to say “I told you so” a lot. So I’m creating a new feature: the “ITYS Alert.” That way, I don’t have to say that cocky phrase, but you’ll know what’s coming. Trust me, I’m never happy to say ITYS because it’s always about bad things.

In the Washington Post, Steven Pearlstein opines over the growth of outrageous executive compensation, despite the weak economy:

The data from this spring’s proxy season is mostly in and it shows that after two years of decline, the average compensation for chief executives of the 500 largest U.S. corporations is on the rise again. According to Governance Metrics International, the average “total realized compensation”…was just under $12 million in 2010, up 18 percent from 2009…

This wasn’t supposed to happen.   The Obama administration tried to reverse this phenomenon. As I said almost two years ago:

The Obama administration is proposing two major reforms. First, shareholders get more power over how much top executives get paid. Second, the company can “claw back” some of those payments after a few years if the stock price starts to tumble.
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The “clawback” provision is a good start. Empowering the shareholders is a nice idea, but it never works. Shareholders are too dispersed and diversified to monitor every executive in every company where they own stock.

Sure enough, says Pearlstein:

This year, as part of the Dodd-Frank financial reform law, companies for the first time were required to give shareholders a chance to vote up or down on executive pay in a nonbinding tally. So far, 98 percent of the votes have gone in favor of the pay packages.

But my larger point continues to be ignored:

But they — and their interlocutors in the press — are missing the real compensation problem.

The compensation that drove the crisis wasn’t in the general’s quarters. It was down in the trenches. The traders who manufactured and sold mortgage-backed securities were paid a fee every time they produced another MBS. They were not paid based on how well that MBS performed. They were compensated for quantity, not quality. They had every incentive to underprice risk and drive home prices to an unsustainable high.

The real compensation problem isn’t on the front page of the Wall Street Journal. It’s sitting at a trading desk just waiting for the next boom.

As true today as when I wrote it in September 2009.

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