Disclosure Of Executives' Compensation

Suddenly, everyone’s concern with executives’ pay has surfaced. It has always been a fun subject at the water coolers and union-sponsored events, but now it’s making inroads into legislature. Should executives’ compensation packages be publicly disclosed? – No. Why? Because it’s a matter of basic privacy. It is simply nobody’s (except the shareholder’s) business. Executives are entitled to the same level of privacy as anyone else. Luckily, it’s not just my opinion, it’s the law.

Having said all this, I think it’s the wrong question. The reason for this question is the apparent lack of correspondence between their pay and the company’s performance. By no means does this apply to all executives. Ellison, Gates, Jobs are some of the notable exceptions. But what about the likes of Wagoner, Ford Jr. or other executives whose companies have been consistently in the red, show complete lack of strategy, and the only way they know how to narrow the losses is by downsizing or outsourcing? Should their compensation packages be made public? – No. However poor their performance is, they’re still entitled to the same privacy as the rest of us. Additionally though, whatever that package is, it’s too much. There’s no justification for any pay increase to an executive whose company does not consistently outperform the market. Why? – If it’s unclear to you, you should not participate in this discussion.

Furthermore, executive packages should be completely restructured to reflect the difference in job requirements. They’re hired for a single purpose: make the company profitable. Um, if you’ve just agreed with this, and have nothing to add, you’re missing the same key component as the boards of directors of GM and Ford. No, they’re not hired to simply make the company profitable. Their job is to ensure that the company is profitable now AND in the long term. It’s not a subtle difference. The Wall Street is in the business of making money this quarter; next quarter they can invest elsewhere. The executive’s job is to ensure the company’s success LONG TERM (tip my hat to Costco). Their compensation packages should reflect that. I don’t understand how an executive can leave a failing company within a year or two after having stolen, I mean received, millions of dollars (and the board of directors just let them!). There are only two potential reasons for that: utter incompetence or corruption.

Here’s what I would propose: executives should be required to manage the company for a term of at least six years. During this term, their salary should be in the same range as their well-qualified professionals (engineers, accountants, etc.). A part of their salary should be put in an escrow account (let’s say 20%). They should not be allowed to make extra money off the company in any way during the first term. By the end of the first term, the company’s performance, and its strategic position should be evaluated, and based on the findings the executives should receive a percentage of the profits (I don't think anyone is going to argue about their salaries if the company is consistently profitable and growing). If the company’s health is found wanting, their escrowed salary should be reinvested back into the business (since they’re clearly not as well-qualified as they claimed). The numbers might be off, but the basic principle behind this is very sound. Executives are hired for their strategic vision and their ability to implement it. Neither one can be appropriately evaluated in the short term. Thus their compensation should be commensurate with the company’s performance over some reasonable period of time.