Executive compensation caps

Happy Wednesday everyone!

First of all, thanks for reading. I hope that you are still enjoying the blog.

Today’s post is about President Barack Obama’s plan to cap executive pay at firms that receive Federal government assistance under the TARP. From the beginning of the blog I have been saying that executive compensation was one of the things that needed to change if we, as a Nation, are to avoid another future financial markets calamity. The reason is that financial incentives do work. So how does the Administration’s plan stack up?

The major details of the plan are as follows:

• Companies that receive “exceptional assistance” from TARP funds cannot pay any executive more than a $500,000 annual salary
• Any additional compensation to be awarded must be in the form of “restricted stock” that does not vest until the Federal government has been paid back                 

I believe that this announcement is a very important one and I mostly like it. The reason that it is important is because of the principle that it embodies. That principle of course is: payment for a job well done and not much payment for a job terribly done. And that’s how it works for all of the rest of us. Wow! What a country! The reason that I only mostly like it is that with salaries capped at $500K it may be difficult for these troubled businesses to attract the talent necessary to actually turn these organizations around. So, in other words, these companies and their shareholders may end up being stuck with the same yokels that got them into the trouble in the first place. But, there is potentially huge upside for these execs, too in the form of the “restricted stock.” If you are not familiar with the term “restricted stock” it is an award of stock given to an employee, but with conditions. Those conditions have to be met in order for the stock to be awarded. In the case of companies receiving “exceptional assistance” from TARP funds, it means that taxpayers have to be paid back before the executives can experience any financial reward from their actions. This is a good thing. A really gooooooood thing.

Importantly, I hope that this action on the part of the Obama Administration eventually leads to a national discussion about executive compensation practices and a change to the way most businesses currently reward their upper echelon employees. Just the sheer inclusion of these executive compensation conditions in the TARP funds is probably giving all other executives at other firms pause for thought. That is a good thing. The next step will be for shareholders, both institutional and retail, to start giving a poo about the subject, too.

BravObama!

Jason