Sense on Cents

There is little doubt that misaligned compensation practices played a very large role in the financial fiasco we have experienced. While the Obama administration is working on a proposal known as “say on pay” legislation crafted through the SEC, a Bloomberg report highlights that it may be more appropriate to define the legislation as “talk is cheap.” Why? Let’s review, Obama Pay Plan Lacks ‘Meat on the Bones’ To Trim CEO Paychecks: 

The plan announced yesterday by Treasury Secretary Timothy Geithner would require companies to give shareholders a non- binding vote on pay, without setting limits. Directors who determine the pay and consultants that advise companies would have to be more independent from management, Geithner said.

The administration proposal is aimed at reducing incentives that lead executives to take excessive risks and quell a political uproar over bonuses paid managers at companies including American International Group Inc. that received U.S. aid. Geithner blamed pay standards tied to short-term profits for contributing to the worst financial crisis since the 1930s.

“We’re not telling clients to be prepared for less pay,” said David Schmidt, a senior consultant for New York-based compensation firm James F. Reda & Associates. Forms of payment may be adjusted as firms give executives additional cash and put some part of their bonuses in escrow for three to five years, making pay dependent on long-term performance, he said.

I have always maintained that well enforced market based principles are the best means for executive compensation to be controlled. The fact that this legislation provides shareholders a voice is a step in the right direction but it falls woefully short. Why? A non-binding vote that is not allowed to set limits is the ultimate definition of “talk is cheap.”

Swing and a miss!!