Executive Pay Reform

As long as Boards are left in charge of determining executive compensation there is little - or no - hope of serious reform. Examples such as the (Ab)use of non-GAAP numbers in setting 'incentive' compensation show that Boards are only too eager to use any ruse that can justify more and more egregious pay numbers. Little wonder, most Board members are on the receiving end when pay is set in the companies they are managing. And even if they are serving on Boards to boost their - usually already bloated - retirement income they belong to the same 'Club' as they will have been on the receiving end of similar 'incentive' plans during their active working lives.
Why Management Is Incentivized to Fabricate Earnings: It's All about non-GAAP Bonuses (davidstockmanscontracorner.com)
(31 May 2016)

Activists go to Washington

One can only wait to see what the 'luminaries' of the Activist investment scene want to achieve by setting up a lobbying group.
Have they not already influence way beyond their actual investment stake in the companies they try to influence - for better or worse, depending on your point of view.
The purpose of their grouping can only be to have a freer hand when getting involved in 'activist' investments, stifling criticism from the media, politics and - most importantly - other shareholders (we may call them the silent majority).
Their aims may often make sense, managements may need a nudge in the right direction. But basically that would just mean to give advice, and free advice. Management should then react in a fashion that it considers appropriate. If the outcome is contrary to the interests of ALL shareholders there is the Shareholders meeting that can decide to change management if that is considered appropriate.
But efforts to get paid off (blackmail in effect) or being able to place a disproportionate number of directors on the board are nefarious practises that have been going on for much too long. If the efforts of the Lobby group are directed towards extending these and similar practises the real aims would be exposed as just another scheme to make a buck at the expense of shareholders and the welfare of companies and their stakeholders.
(19 May 2016)

Simple Solution to CEO Compensation problem

ProGov suggests a simple solution to the problem of excessive executive compensation. As the fish starts to smell at the top the problem really is in essence a problem of excessive chief executive compensation. In order to control executive pay all chief executive compensation should consist only of a basic salary and perks (incentive bonus, share options, pension and medical care) that are granted pro-rata to ALL employees of a firm. That way any discriminatory pay that favors the man at the top is prevented. The gaming of option, incentive and pension schemes is avoided. No complicated performance targets have to be designed and policed. It is also morally repugnant if chief executives (and a select caste of other 'senior' executives) help themselves to gold-plated pensions, parachutes etc while the rest of the workforce gets the crumbs that fall off the table. Of course, chief executives may receive base salaries that are (too) high but that will be more easy to monitor and police. Discretionary and discriminatory option awards will be a thing of the past. And Chief Executives will have more incentive to moderate compensation further down the ranks. All incentive schemes and pension schemes should be based purely on a pro-rata basis and exceptional performance pay for individual employees can continue to be freely set by the respective line managers.
11 Nov 2013

Weasel Words on Executive Pay

'Concern', 'Dissent' and 'Rebellion' are coming up again and again with respect to Exec Pay, but they are weasel words used by the media and commentators, where is the BEEF? There is no clear approach to the problem, neither what level the pay should be, the way it should be decided and how any reforms should be implemented. The usual refrain that soandso company has decided to engage with shareholders says it all. The shareholders OWN the company, it is not the other way round! And who are the shareholders? they are NEVER asked as it is only the Fund Managers, i.e. Fiduciaries, who are in cosy chats with management without asking for ANY input from end investors!
(10 May 2016)

Outcry about Exec Pay - but still no viable Solutions

A few recent headlines picked from the acres of print dedicated to the question of how to limit 'excessive' Executive Compensation:

"Shareholder Voices heard loud and clear" (CityAM, 4 April 2016)

"Time for Shareholders to stand up for their Rights" (Times, 30 April 2016)

"Snouts still in the Trough" (Daily Mail, 23 April 2016)

You may agree or disagree with the basic premise of Exec Pay being 'excessive'. I would be in the camp that thinks it is way out of line with what is necessary to 'motivate' CEO's and senior Management to do a good job, and let's not forget that there is the question of the morality of the whole process.

But one aspect receives very little mention: If one agrees with the underlying argument that these - and many other - commentators make with respect to Pay, what measures will be required to bring Exec Compensation back to earth. Just hoping that Company Boards will do a better/different job would just be a triumph of hope over experience to speak with Samuel Johnson.

And this leads to an even more important question that will have to be addressed first: What is the 'appropriate' level of Executive Pay? Just setting a limit with reference to average/medium pay in an organisation will not do the trick.

And hoping that the 'Shareholders' (who really are nothing but Fiduciaries for the real End Investor) will suddenly be able to exert a decisive influence is not going to be successful without clear and firm rules and standards. Ad-hoc decisions on the pay arrangements for thousands of companies that require in turn scrutiny by hundreds if not thousands of fund managers that are under constant pressure to perform and manage their business may lead to some high-profile scalps but not change the basic problem in a sustainable fashion.

Your author does not have the answer to these questions - although you will find some tentative efforts in this blog. But maybe you want to contribute your thoughts in order to start a discussion that ultimately will lead to some practiable solutions to the problem.
(10 May 2016)