Would this simple idea help prevent future abuses by CEO-types?

Great Debates
#1

The idea is to have any bonus or any compensation a CEO receives beyond his salary put in escrow for two years.

That’s it.

So, if a board of directors approves a bonus of X, it goes into an interest-bering escrow account for two years, at which time it is then passed to the CEO. Of course, if the company goes belly-up or finds itself in dire straits, the total amount in escrow reverts back to the company and its stockholders.

I like this idea for two reasons. One, it seems to offer protection against the kind of chicanery we’ve seen of late. Two, it aligns with the longer term outlook a CEO is supposed to operate from.

So, what do you think? Could it be instituted? I don’t see why not. Good idea? Bad idea?

#2

I don’t think it would prevent all abuses, but it would probably help cut back on the “wreck the company, take the golden parachute, and run” style of management. It seems like a worthwhile experiment to me, at the least.

#3

No, no doubt it would not prevent all of them. But it seems like it would avoid the egregious abuses we’ve recently seen. It also, I think, reminds both the Board and the CEO to think longer term, which is their charge.

#4

What’s the difference between this and staggered-vesting stock options, which are already a large part of executive compensation?

#5

I’d say we need to change the culture. The cult of the CEO needs to go away. You don’t need an overpaid ubermensch figurehead to make a company successful. People who gravitate towards those types of positions tend to be narcissistic and you need leaders who are willing to share power and accept ideas from other people.

#6

That would help to some extent. Unfortunately, relatively fixed interest rates by the fed creates an environment without the appropriate price discovery mechanisms; If you keep the cost of money artifically low you get a glut. Too much money chasing too few financial assets creates unrealistic asset price inflation, eg, bubbles. Let interest rates float and you won’t create environments that allow CEO’s on Wall Street to postpone the effects of their speculating until they’re long retired.

#7

Culture seems the bigger problem, just like unsound companies having a high stock price makes for some undeserved rich people. Can’t legislate away stupidity sadly.

#8

Most CEO’s already receive forms of compensation tied to the long term return on the company’s stock price. In theory, CEO’s get paid what they get paid because that’s what they would command on the open market. But I think that there’s alot of behind-the-scenes handshaking and wink-winking between CEO’s and directors going on to elevate this pay. I personally feel that the government should audit CEO pay packages with the purpose of protecting shareholder rights. And I think that companies should have to prove that there was real competition for the position.

The fact is that a CEO’s impact on the future success of a company isn’t as great as some may believe. A business’s success ultimately depends on factors that it controls (costs, investments, etc.) and on factors that it doesn’t control (its market, costs of raw materials, etc.). How much can a CEO really affect either? Not much, in my opinion. Any CEO would be faced with the same set of strategic decisions, and it usually doesn’t take much skill to pick the correct ones from a list of options eg. People like using mobile phones? Let’s put up towers. Duh. The CEO’s not coming up with the idea of mobile phones.

Since shareholders can’t seem to understand this and police CEO compensation, it’s the government’s responsibility to monitor the process of determining compensation. I think that this would drive down pay packages significantly.

For these very same reasons, I disagree with the OP’s idea. Why should a CEO have to give back her salary if the company doesn’t do well? None of the other employees have to give back their salaries. And in fraud cases, CEO’s are already personally liable with all of their assets on the line.

To me, the fairest and most effective way to reduce CEO salaries is thorough examination and public communication of the process.

#9

I heard some friends saying that CEO’s are paid that much because the board who approved that pay amount are CEO’s of different companies that CEO is a part of the board on. Or something like that. You know scratch mine, I’ll scratch yours and we will all live in a land of wealth.

I’d like to add, I don’t know if there is an ounce of truth to that, I never researched it!

#10

Relatively high executive pay is almost exclusively an American phenomenon.

Now, did the Detroit 3 get a better caliber of management for the price they paid? It’s hard to say. I think the general response t this is that for you and I, millions of dollars per year sounds like a lot, but it’s not as if these companies are going to return to profitability if you paid the managers nothing. When you look at the big picture, the CEO’s paycheque just isn’t that big of a deal.

#11

I am really unconcerned about the absolute level of CEO pay. To my mind, it has to do with encouraging risk-taking. Stockholders want their investment to have a big return, which means taking risks. One way (maybe there are others, please let me know what you think) is to pay CEOs handsomely, as people are a bit more mellow about risk-taking when they aren’t concerned personally about their own welfare. If a CEO had to worry about where he would find his next meal, then he might not be as eager to take the very risks that the shareholders ultimately desire. (Hyperbole, I know.)

That said, I have no real problem with the proposal of the OP. It will discourage some risky ventures, but that’s actually fine with me because the equation I mentioned above is missing a key variable: employees. They have little to gain when the company does well (certainly not the level the shareholders) and a lot to lose when a company tanks. Encouraging risk is not a bad plan, it’s a recipe for progress, but it can be taken too far. And incidentally it does not help to suggest that employees should therefore become shareholders so they can benefit when the company gains, because it doesn’t add up when the company loses: they lose the share value and their jobs, and the opportunities they gave up by putting their money into shares in the first place.

So, yeah, I’m all for discouraging the level of risk we currently live with.

#12

It depends on how you measure it. If a CEO is overpaid by $5 million per year (relative to his “value”), the overpayment would reduce the average company’s market value by $60 million. Salary * (1 - 40% tax rate) / (8% cost of capital - 3% growth rate). That could be considered a big deal to a $2 billion market cap company.

#13

Gotta give magellan01 some credit, this would seem like a step in the right direction.

I agree with other posters that thought it would help, but that it wouldn’t be enough in and of itself. The whole culture needs an overhaul.

#14

I think death by firing squad for embezzling more than $5 million or receiving more than $5,000,000 from a company that requires government bailout would be a much better incentive.

#15

I did say anything about giving back their salaries. They get to keep the $550k they get a check for every month. I’m talking about the bonuses awarded them. Just recently we had million doled out as bonuses and the company folding a very short time after.

And I’m not even interested in reducing their salaries. Let them make what the market will provide them. If someone can add as much value to a company as Steve Jobs, let him make a ton (although his salary is only $1.00). But I do agree that the Boards have a I’ll-scratch-your-back attitude. I think everything should be out in the open, and the Boards themselves should be scrutinized, and even held accountable. When they approve a multi-million dollar bonus to a CEO and the company tanks right afterward, I think they should be charged wioth malfeasance. They have a legal fiduciary responsibility to the company—not the CEO.

#16

The usual answer to any of these sorts of proposals is “but if we have to do that, we won’t be able to attract executives of the necessary calibre - they just won’t be interested”. I’m not sure how valid an objection that is, but it would be quite forcefully expressed.
Unfortunately, the folks who would have to approve this are in the affected category - failing some sort of heroic altruism, it doesn’t seem likely to happen.

#17

And what about the CEO who does something that wrecks the company in the long term but raises it’s stock in the short ( like indiscriminate mass firings ), so he can scoop up the bonuses before leaving on his golden parachute to his next CEO job while the company crashes and burns behind him ? A CEO can do a lot more harm than good ( the “it’s easier to destroy than create” principle ); a proposal like this at least makes it less profitable to do so.

I’ve read the same. No cite, since I can’t recall where.

#18

See, here I feel you are simply against the idea of a corporation as such. The best way to ensure personal accountability is to eliminate the corporation, plain and simple, and have people’s asses directly on the line. Personally I hate corporations, I think everything should be privately owned, even if that means people have to wade through a ridiculous amount of contracts in order to work together. The corporation shortcuts around responsibility. Unfortunately you only need one country to feel differently and you fall behind. So, corporations are here to stay. Reintroducing a strict level of accountability eliminates the entire purpose of corporations in a terribly inefficient way: if you want to restore accountability, eliminate the concept of the corporation.

So, in summary, I think you don’t want what you say what you want. If I may be so bold, you want to minimize risk-taking behavior. One way to do this is to hold people personally accountable on a grand scale. Another way is to reduce incentives for risk. I thought the OP was the latter.

#19

Huh?!?!?! I have no problem with corporations. At all. What in the world gave you that impression? And I do want accountability. I want to hold the CEO accountable. And the board members themselves.

#20

Allow me to be more clear. Removing personal accountability is exactly what the corporation does. It is exactly why corporations are such a powerful tool for growth. If you want to restore accountability, your plan is simple: eliminate the corporation.

The benefit of a corporation is that people can get involved in a project without that project completely ruining those people. It encourages risk-taking behavior by removing personal liability (except in criminal matters of course). We like that risk-taking behavior. It benefits us all when risky ventures succeed. It is progress on steroids.

If, then, the problem is that you feel they are being too risky, then the plan should be to effect incentives to reduce risk. Your pay plan is just such a thing. I’m sure there are others. However, in the post I quoted, you expressed a sentiment about holding people personally accountable again. I find this to be at odds with “[having] no problem with corporations,” since that’s basically all a corporation is.