Dick Syron, former CEO of Freddie Mac (NYSE: FRE), collected $38 Million for "running the ship into the ground", and in the process lost more than $50 Billion of the shareholders' value. The shareholders included not only regular investors, but also banks and other financial institutions. The resulting cascading effect from the shareholders' loss sent tremors all over the world. Here is Syron's quote on the collapse: "If I had better foresight, maybe I could have improved things a little bit. But, frankly, if I had perfect foresight, I would never have taken this job in the first place."
I wonder how many shareholders are thinking along those same lines, using their "perfect foresight" to not have hired Syron in the first place. There is a fundamental problem with executive compensation in corporate America. When the company does well (clearly, in spite of a self-admitted lack of foresight), the executives enrich themselves like there's no tomorrow. When the company tanks, it is the taxpayers and the shareholders who are left holding the bag. This pattern repeats itself time after time: Merrill Lynch (NYSE: MER), Fannie Mae (NYSE: FNM), Freddie Mac, Bear Stearns, Citi (NYSE: C), Home Depot (NYSE:HD), the list goes on….
If the IRS can go back and audit your taxes for the past three years, how about an audit of corporate compensation! Say, if the stock falls below a pre-determined value the excessive compensation beyond basic wages has to be returned (or, even better, is kept in an escrow account and not released until 3 years later!)
Another possibility is to keep a dollar-weighted average of the stock price for three years while the executive is still employed with the company and only in the 4th year will the executive collect the bonus for the first year based on the average performance of past three years, then in the 5th year he or she collects the bonus for the average performance of year 2, 3 and 4 on the job, and so on. This will allow for long-term decision-making instead of short-term personal gains and align the interests of stockholders with those of the executives.
What do you think?
Monday, September 8, 2008
Freddie Mac's CEO and How to Fix Executive Compensation
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2 comments:
I think some of these compensation packages are interesting ideas but would it be applicable in all cases. For example, a blue chip company might have a much more stable stock price while a smaller company might have more volatile stock price. Which CEO should be compensated more? What about cyclical natures of certain industries like real estate and construction. Should CEO's be compensated or penalized because of it?
I agree with the overall theme that CEO compensation is out of whack with actual performance but I'm not sure what the right solution should be. For one thing the CEO salary to average worker salary shouldn't be as high as it is today.
Personally, I'd like to see CEO salary be voted on by actual workers instead of just the board. I think this will enforce a much more stringent assessment of CEO success and value to a company.
Thanks for the thoughtful comment. One of the reasons I think this would only if averaged over a number of years (four or five), is to contend with exactly the volatile stock situations you describe.
My hope is that by aligning the financial interests of the CEO with the financial interests of the shareholders, the result will be beneficial to everyone (shareholders, CEO, and workers), rather than solely to the recipient of a "golden parachute."
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