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Print Edition StoriesFriday, August 14, 2009
How I See It
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Last week, Andrew Cuomo, the attorney general of the state of New York, issued a report on bonuses at financial institutions that received Troubled Asset Relief Program funds titled “No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture.” It detailed how the bonus pools (executive and non-executive bonuses) at six of the nine largest TARP recipients were greater than their entire reported corporate earnings for the year. How could this have happened, the press, the public and legislators wanted to know?
In the cases where bonuses exceeded firm profitability, this situation was clearly the result of compensation committees not paying attention to the overall amount of money that was being paid out, and the blame falls squarely upon them. When bonuses are greater than the entire profitability of a public company, the situation is clearly wrong, regardless of the claims that they needed to do this to be “competitive.” This is simply not good business judgment.
These banks obviously looked only at what a very insular peer group of firms were doing to define their compensation levels and practices, and as such, lost sight of broader market trends and best practices. Their practices exist in no other industry in corporate America, including some that also have very difficult labor markets in which they must compete. They also lost sight of their shareholders — this was a case of not appropriately balancing the shareholder/executive and key employee equation in that the scale was tipped way too far to the executive and key employee side of the equation.
Where do we go from here? More disclosures as proposed by the U.S. Securities and Exchange Commission are laudable but not the answer to preventing bad oversight by compensation committees. Those committees and their hired consultants need to be independent, both in perception and reality. Better oversight by truly independent boards who think and act like owners would be a huge step in the right direction to curtailing outlier executive compensation practices in the largest financial services companies.
Compensation committees in the largest banks need to fundamentally change their executive compensation strategies so that short-term commission-based pay (which is a structure of pay often found in a partnership but rarely in public companies) is replaced by longer-term pay linked to increasing enterprise value. The notion that employees are irreplaceable and require out-sized non-marketplace norm pay packages should be replaced by the concept that owners are rewarded appropriately for their investments. And incentives for certain specific (and often risky) behaviors that generously line the pockets of a few executives are eschewed in favor of incentives that encourage collaborative behaviors among executives to improve the overall strength of the company.
New England high-tech firms do not have the pervasive bonus issues that the financial firms do, in terms of the amounts or the structure of the plans. There certainly is likely to be some impact on public high-tech companies from all of this, however, in that firms will need to begin disclosing the relationship between executive compensation and risk and almost certainly offer shareholders a non-binding say on executive pay.
Jack Dolmat-Connell is president and CEO of DolmatConnell & Partners Inc., a Boston-based compensation consulting firm (www.dolmatconnell.com).
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