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Weak, Pathetic Executive Compensation Limitations

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The proposed Emergency Economic Stabilization Act (aka, the bailout) contains pathetically weak limitations on executive compensation.

As indicated in Section 111 of the Act, for companies whose bad debt is acquired without an auction process, and for which the US government gets an equity position, and only for such companies, executive compensation is to exclude provisions that might encourage the executive to take unnecessary risks and prohibits golden parachutes.

You and I remain on the hook for basic salaries in the multimillions of dollars for people who brought us all to this precipice. And, the executives can receive stock options (or stock), but just not too much that could run afoul of the "incentives to take unnecessary risks".

Anyone wish to wager that there will be any grants of stock or other contingent compensation that will be found to be excessive? I would not bet your illiquid mortgage-based security on it.

You and I buy the assets, they can still get multimillion dollar salaries. If there ever was any doubt that Congress remains the captive of Wall Street, one need not look any further. I smelled a rat here when Henry Waxman, upon whom we depend to uncover the malfeasance of the Bush administration, proposed a limitation of $2 million. $2 million, at your expense and mine. Henry Waxman, say it ain't so!

If the government acquires at least $300,000,000 in an auctioned process, then only golden parachutes are prohibited.

With all the dire predictions of what is likely to remain a depressed financial sector (i.e., stocks of those companies not expected to rise to high levels) for the next few years, the options (or stock) they might have otherwise received are not likely to be very valuable anyhow. In this environment cash is king -- and that is exactly what the financial executives are left with that is totally unfettered.

Moreover, there is a lot of sleight-of-hand here. Whatever they do not get in stock that would not have appreciated much anyhow, whatever golden parachute no longer exists, they will just negotiate for more cash in salary to make up for it. Here's how it works: take an executive with a $5 million salary, if there were stock and golden parachute to accompany it. And, let us say that the parachute would have been a year's salary. So, they negotiate a salary of $6.7 million and in three years they have made what the golden parachute would have provided in cash.

That is, all these terms are fungible. If the entire package is not limited, there really is no restriction.

I do give Congress credit for including a "clawback" provision, to get back money paid in golden parachutes. it will be interesting to observe whether they ever try to enforce it. Again, I would not bet your illiquid mortgage-based security on it.

Knowing what they have not done, you will now be treated to their rationale, for which they will advance two reasons: these companies need talent. They are not going to be able to attract that talent if the salaries are restricted goes the argument. The second reason is that executives may not avail their companies of the bailout if there are too many restrictions on their compensation.

There is some truth to the first assertion if by talent the government means to recycle the executives who brought us this mess. But, there is always a pool of younger people who are at least as talented, whose jobs are either at smaller institutions or lower down the totem pole. They can be attracted by the challenge and the knowledge that, if they are successful, then after the government sells its positions, they would be leading reconstituted, profitable corporations that could then pay them more.

This is common practice in startup technology companies to attract such people to a promising enterprise. So, once again, the country has been treated to a convenient capitulation to conventional wisdom, and lack of imagination.

And, after all, are these financial institutions not "re-starts" if they are anything?

The second assertion -- that the executives would not avail their companies of the government money to maintain their salaries -- does not pass the laugh test. Any executive who did that would face gigantic shareholder lawsuits for not taking advantage of measures that could strengthen their companies' share prices. Boards of Directors who did not fire such executives would be first sued and then replaced. It would be one of the few examples of corporate democracy in history.

Congress capitulated. If only that were news.