The House Financial Services Committee held a hearing yesterday, Compensation Structure and Systemic Risk.
Contained within the Q&A is this fantastic question by Representative Alan Grayson (D-FL-8th): How do we hold these executives accountable when they have destroyed their own banks?
Contained within is a mention the SEC can ban someone as unfit to serve. The details are not clear, possibly gross incompetence needs to be proved ..
Instead of debating how filthy rich an incompetent CEO should be....wouldn't it be so nice to plain not have the same incompetents running again and again our corporations (as well as our government)?
(let us look at the new GM in another post shall we?)
There was another bombshell in this hearing. Harvard Law Professor Lucien Bebchuk's testimony, (a 56 page document), details how executive compensation is structured to create systemic risk. Bebchuk also wrote Pay without Performance and is an expert on executive compensation.
Standard pay arrangements reward executives for short-term results even when these results as subsequently reversed. The ability to take a large amount of compensation based on short-term results off the table provides executives with powerful incentives to seek short-term gains even when they come at the expense of long-term value, say, by creating latent risks of implosion later on.
An analysis of banks’ financing structure and compensation arrangements shows that bank managers’ incentives have been tied to a highly leveraged bet on banks’ assets.
The crisis has not eliminated the incentives of bank executives to take actions that are beneficial to common shareholders of the bank holding company (or holders of options on such common shares) but are costly to bondholders, depositors, and the government as guarantor of depositors.
Opponents of pay regulation in banks will argue that the government does not have a legitimate interest in telling bank shareholders how to spend their money. But it does. Given the
government’s interest in the safety and soundness of banks, government intervention here will be as legitimate as the traditional forms of intervention, which limit banks’ investment and lending decisions.
Bebchuk suggests only institutions who pose systemic risk should have "cash out black out" of vested shares, timed at fixed intervals. While Bebchuk's recommendations seem exceptionally promising to align the interests of the business with the interests of lining one's own pockets, I must disagree these rules of executive pay should only be done with the too large to fail institutions.
Executive compensation in the United States is structured so poorly, while other companies did not cause an economic collapse, CEOs and executives assuredly did not act in the best interests of shareholders, employees and the nation, often by similar incentives described in Bebchuk's testimony and book.
Since executive boards are some sort of incestuous round of golf boy's club, instead of oversight teams, the government does need to force an executive pay restructuring of these business entities.
Here is an interview with House Financial Services Chair, Barney Frank. Frank suggests much more government regulation of executive pay, again along the lines of restructuring, is needed than put forth by the Obama administration and the U.S. treasury.
My question is can the United States government, actually get this one right? Let CEOs get stinking filthy rich. Simply align that prospect with what is actually in the best long term interests of the company and this nation.
So far, the government has meddled and it continues to rhyme with muddled. Can we get very specific policy based on statistics, analysis, fact, that doesn't game the system by some special interest group in some way? That doesn't make the situation worse?
A more in depth piece, Corporate Citizen, an Oxymoron has additional references to align corporate behavior with the national interest, and yes that includes the interests of making everyone a lot of money, long term.
Meanwhile BoA CEO Ken Lewis brazenly denies the sweet fix was in the Merrill Lynch takeover deal before Congress.
The entire hearing (link enables transcript search).