Wednesday, September 18, 2002

Remora

Commoditizing exec compensation: a modest proposal

The news about Oracle comes, in LI's opinion, at just the right time. Larry Ellison should be a poster boy for bad corporate behavior. His total compensation package came in at number one in the Forbes CEO pay list. How did he win the greed sweepstakes? By taking home a cool 706 million dollars in stock options that he exercised. Ellison has a little gimmick he plays -- he paid himself, officially, a dollar in salary last year. Well, who needs a salary when your company dilutes its stock to the extent recorded by Mercury News

"Oracle CEO Ellison collected $706 million after exercising stock options and immediately selling the shares in January 2001. The gain meant Ellison set a record in business history for realized annual compensation -- which excludes the value of unexercised options. He received no salary, bonus or other pay last year. Oracle stock fell 61 percent to $15.30 during the fiscal year ended May 2001."

We just wrote a little review for the National Post about an Enron book. It hasn't been published yet. We excized a last paragraph considering extensively the underconsidered reason that executive total compensation has exploded: the insulated nature of the job market in upper management. It is a bit of a joke calling upper management a job market -- it seems more like the Big Fix.

Instead of seeking a market solution -- in other words, how do you make executive culture more competitive -- and letting that drive compensation downward, the idea that executives are something 'special' prevails among compensation reformers. The latest reform is reported this morning in the NYT

"A panel of business leaders proposed changes yesterday in the way corporations pay their top executives. Included in the changes are the prior disclosure of executive stock sales and the uniform treatment of stock options as expenses.

The panel, the Commission on Public Trust and Private Enterprise, was convened in June by the Conference Board, a research group based in New York. The group joined a long list of organizations offering recommendations on overhauling the way corporations govern themselves."

The panel's suggestions are good:

"Other proposals announced yesterday included a recommendation that companies seek shareholders' approval before stock options are repriced and that executives hold shares for a longer period before selling. In addition, the group recommended that compensation committees of corporate boards, not management, retain and direct the activities of outside consultants."

But they merely hint at what is needed to break the monopolistic practices that structure the interlocking interests of corporate boards, top executives, and 'consultants.' What is needed, with execs, was what was needed with electricity, natural gas, and metals: a way of commoditizing them, trading them, and hedging against exec compensation volatility. Is LI suggesting a futures market in executive compensation? Well, something like that. We need to make those compensation packages transparent; we need a way to index them; and we need to use that index to make executives compete among each other for positions, rather than having the holders of positions compete for the executives. It is as simple as that. The way in which corporations compete for executive talent makes sense if, indeed, the corporation is in a relatively new field -- such as PCs, in the late eighties. But as the field matures, prices for those executives should go down. Furthermore, those compensation packages shouldn't lift the compensation awarded to executives in more mature fields. Just that has been happening, however. One of the forces that drives Mergers and Acquisitions is the incentive, among the management class, to create something like a new field, and to then justify inflated compensation as the product of an unstable management situation. This is one of the reasons that M&As are a notoriously bad bet -- historically, they have a well known tendency to create underperforming companies.

However, don't expect LIs suggestion -- or any suggestion that we let the magic of the market-place intrude into the magic kingdoms of CEO-land -- to ever be taken seriously. That is, until boards of directors become real jobs, instead of part time honorariums, and those boards then begin to eye the incipient indexes that already exist -- the annual CEO salary list by Forbes, for instance -- and use it as an opportunity to cut exec cost.

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