Konamoxt, Inc.

In today’s House Financial Services Committee hearing, several CEOs of the largest and most prominent banks to receive TARP money were grilled by Congressman. 

On interesting bit of news was Vikram Pandit’s announcement that he has instructed his board that his salary should be set at $1/year and he should receive NO BONUS until his company has returned to profitability.

This is particularly interesting when you consider the debate that has been brewing about executive compensation and the recent rules set by the Obama administration that companies receiving TARP funds must cap their executive compensation at $500k per year.

Many people have argued that this cap will cause “brain drain” and a flight of talent away from an industry where talent is most needed. When I posted the comment “Executive pay caps for TARP, your thoughts?” on my twitter/facebook feed, I got a received a fair amount of debate from my friends and colleagues.

Bob: I’m not supportive of exec pay caps. Regulation-yes, accountability-yes, but pay must be based on performance to be competitive globally. Unlimited upside and unlimited downside. We’re shooting ourselves in the foot with pay caps. Motivation issue. Clearly, no compensation for failure. But the talent will always follow the money - to other industries or even other countries

Me: I agree that we should allow performance to guide compensation, but the results from 2008 suggest that we had a system of unlimited upside and limited downside. Multidecamillion payouts for bankruptcy is not an incentive to make SMART risks, its just an incentive to take bigger risks.

Interestingly Larry Kudlow (can’t get more free market then him can you) said he liked all the elements of Obama’s plan. Basically:

• Small base salary (check)
• Incentive “bonus” through restricted stock options (check)
• No golden parachutes (check)

This sounds like upside for success, and downside for failure to me.

Chris: These top execs have been over-paid for so long and now they’re just making sure that they’re not being over-paid with tax payer money. Makes perfect sense to me.

Bob: “Overpaid” is relative. Was Bill Gates overpaid? 25 years of MSFT shareholders would probably say no. Many other examples. The issue is regulation, oversight, accountability where the public good is at risk, e.g. banking. Clearly we’ve got serious housecleaning to do. But I believe in the power of the individual and great execs are not commodities. If compensation is a motivating factor in an exec’s decision to join/stay with a company, then it is highly likely they will follow the money to companies without compensation caps, which will ultimately hurt or even destroy the capped companies that are now funded by our taxes.

Me: I agree with Bob, that “overpaid” is relative. Also, clearly, the market has allowed the current state of affairs to exist/expand. Not unlike pay in Major League Baseball, companies have been chasing star executives with more and more lucrative packages for fear that the “great manager” will go to the next firm that offers a better package.

So, I agree that we should let the market set compensation…

However, we have long since left the free markets when these companies, managed by these start managers, imploded and required tax payer support to keep themselves afloat.

It’s a little like the young adult who after leaving home, partied away all his inheritance on sex, drugs, and rock’n'roll, and now has come crawling back to live with/off his parents. The idea that their would be new rules in the house: no parties, no hookers, no drunken metal fests at 3am… doesn’t seem unreasonable if you’re gonna live in my house.

Also, heard a great line on NPR yesterday…

“But if we don’t pay these executive market compensation, don’t we run the risk of the ‘best and brightest’ going somewhere else? Won’t the replacements perform worse?”

“How could the replacement perform worse? The current batch has produced the worse results in more than three generations. It’s very unlikely anyone will perform worse.”

Chad: the Obama plan looks pretty sharp - market decides incentives through stock options.

Do a great job, stock goes up. Rake in your duly earned merit bonus. now shut up and row!

Bob: Agree. Punish bad behavior, reward good behavior. But fix/regulate the playing field, not the reward-punishment system. Match the medicine to the disease.

Me: Great point Bob, but… I’m starting to think that compensation structure may actually be part of the disease.

Follow me on this:

• The circa 2007 comp structure rewarded taking bigger and bigger risks, and had little or no downside for failure.
• This resulted in smart people coming up with ways to take astronomical risks (massive leveraging) but since there was no downside for failure they stopped paying attention to the potential ramifications of the risks.
• This sense of all greed for the upside (ok if balanced with fear) and no fear of the downside (whoops, what’s balancing the greed?) fueled the sub-prime bubble.

Regulation - requiring more disclosure of the risk, more transparency, etc… might have helped slow it down, but, I doubt that really would have done much.

I like the idea of giving shareholders a vote on comp packages, at least that would create more transparency. In this case, for TARP, tax payers are the share holders, seems reasonable to Obama the proxy vote.

Chris: Great CEO’s in this generation work for pride and getting their companies where they want them to be. Both Gates and Jobs both take $1 annual salaries. Gates was actually in front of congress and when pressed on his salary he did comment that today’s executives make too much for too little.

Bob: There are so many factors behind our economic problems that I would never claim to understand even a fraction of them but I know that corporate CEOs are definitely not the only issue. Obviously, a big issue is how we keep score as a culture, which created these guys in the first place. I am a bit of an idealist myself but I’ve been around long enough to know that money talks, and for better or worse, we’ve got to compete with China, India, the EU and Russia. I want the companies we bailout to succeed and I just hope that salary caps don’t result in the next generation of management superstars passing over certain companies and industries that we need as a nation.

The news that Pandit is willing to work for free, would seem to suggest that the idea that brain drain will occur if we enforce salary caps is not true. Now, to be fair, there are plenty of people who are detractors of Vikram Pandit. And so he may be a case of exactly the wrong kind of person we want leading out of this mess. But if we believe that the market knows how to pick good leaders, than Pandit is a product of that exact same market we seem to trust. We can’t have it both ways.

Independent of what you may think of Pandit as a man or Citi as a company. I am pleased to see a business leader who is willing to stand up and really put his money where his mouth is.

Filed by Brad Hefta-Gaub at 11:58 am under Entrepreneurship, Leadership
Digg! this story.