On executive pay and bonus cap from government stimulus plan...

The recent announcement of the proposed government stimulus package from the Obama administration includes a clause which would cap the executive pay of all firms seeking bailout money to be $500k. The pay for US presidents is $400k, so it reasons that giving the celebrity CEO's an extra $100k seems to be fair.

That proposal caps the public imagination and anger over the outrageous Wall Street compensation while the companies were bleeding cash. The latest whipping boy is John Thain, the ex-Merrill Lynch CEO who managed to sell itself to Bank of America when Wall Street was going down (Lehman, for one, failed to get sold or rescued by Washington; hence bankrupt now). He was lauded not to have the emotional attachment the way Dick Fuld had with Lehman, hence be able to decide on clinical terms that Merrill could not survive unless sold. That could well be, but Thain's decision to accelerate the bonus grant to Merrill executives, from Jan 2009 (when BoA will take over all decision making) to Dec 2008, thereby shortcircuiting BoA, upset many. His spending of more than $1 million in decorating his Merrill office, amidst horrible economy and company performance, parallels the bad deeds in the Enron, Tyson, WorldCom days.

To be fair, the Obama cap would grap news headline, but I very much doubt if it achieves it intended consequence. Big companies CEO will get paid more than $500k, that much for sure. If it's not in cash and stocks/options, they'll finagle a way to get themselves the compensation. And if the companies do earn its keep, I don't think anyone would mind paying them. The more fundamental issue is, how do we (or the companies) decide what "performance" is real, and what is just smoke-screen. The problem is, most Wall St firms pay bonus based on short-term yearly results. Traders would love to take big positions, and if it works out, take the big bonus with no ramifications; if it doesn't work out, it's the company/shareholders who are holding the bag.

As we can see now, all those who had a hand in all the subprime and mortgage mess (from credit agencies who routinely rated every junk tranch as triple-A without a clue what's going on under-the-hood, to Wall St who sliced the underlying securities with no care for inherent risks and pushed them to investors, to everyone down-stream of course, from mortgagees to property appraisers, etc) were all paid based on the here-and-now transaction volume. When the securities turned sour, all these parties would have received their compensation, including all the traders and investment banks in Wall St, long long ago. Is it fair? Absolutely not.

The question is whether the Obama cap is going to prompt all the compensation committees in public companies to start looking at tying long-term company performance (not just the short-term year-on-year gains) to compensation of ANYONE, CEO included. But to tell the truth, I'm not holding out my breath.