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Sunday, October 25, 2009

Executive Pay Mess

As I was reading through my Wall Street Journal opinion pages yesterday, I came across a great article that explains the executive pay mess that Wall Street, and others are facing. "Washington's Plans May Result in Even Higher Executive Pay " explains how a Congress, in 1992 decided that cash payments to executives were wrong, and didn't tie their compensation to actual company performance. They also thought that boards of directors weren't doing enough to increase shareholder value, and that by tying their compensation to performance it would create an environment that would make us (shareholders) more money, and keep executives from being overpaid for under performing.

Now of course, Congress is ticked off that executives get big stock option bonuses, based on performance guidelines they codified 17 years ago, and want to change the system, because evidently it's unfair again.

There are a few outcomes that are nearly sure anytime congress does anything. One is they won't accurately predict the results. In 1992 it was thought that executive pay would stay fairly stable, while shareholder value went up. But since they wrote a bad law, only one of the two did happen, shareholder value did go up. But executive pay skyrocketed based on the criteria congress laid out.

Now, we are seeing the other end of the spectrum. While the President complains banks won't lend enough, he signs bills that punish the banks, and specifically the boards, for taking risks.

Look over the financials and you see that AAA corporate lending is back to a pretty steady track, where it was in the 2006 and 2007. Small business, venture, and personal lending, the riskiest types are languishing far behind.

This is rightfully so based on the way the TARP program has worked. Now the rules are take out too much risk, and the boys from the Fed will show up with a check you can't refuse, and take control of your bank, either explicitly or implicitly through congressional action.

The worst is yet to come, though. The new pay schemes, if they work at limiting executive pay won't just slash pay, they'll slash talent. The folks at the top of the banking industry aren't rubes, they can work in nearly any industry and be successful. So when the government decides what's "fair" compensation for anyone who took bailout funds, they'll just bail out of the industry.

What we'll be left with is an industry that's full of newly promoted former middle managers, who didn't leave because they were afraid they couldn't succeed elsewhere. The result is going to be less money for anyone to borrow, with you and me still at the bottom of the list to get that money.

And of course, Congress will wonder why this happened.

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