27 February 2010

A Market Solution to Capping CEO Pay

I personally believe that CEO's of PUBLICLY Traded companies, should never be paid more than 10X the Median income in the State they do business in because of that. It's a publicly traded company, not a completely private firm, doing business with completely private money. However, I DO feel that there definitely should be Stock Options given to attempt to match the pay at private companies.

How would this work?

Let's say that you're the CEO of Fannie Mae, and your pay is around 500,000 a year, which is about 10X the median income in DC, where the company is headquartered.
As part of your compensation package, you also get a pool of Stock Options, let's say 500,000 shares (about 1 for every dollar earned), that you can exercise in 5 years. Let's face it, any decisions you make today, won't really impact the company for at least 3 to 5 years.
Now if you did as the last CEO of Fannie Mae did, and lower the value of the stock from 70 bucks a share down to a couple of bucks today, then your Stock Options would be absolutely worthless. Why? Options are given at the price they are the day they are given. In other words, if the price of a share was say $70.00, and over 5 years went up to say $100.00, then your options would be worth around 30 bucks a share, or 15 Million Dollars. 50% higher than today's average "Big Gun" pay of 10 Million a year, but here's the big difference in my "Market Driven" compensation plan.

If you drove the company into a ditch, as Fannie Mae is in now, the options are worthless and you get ZERO bonus. Since it takes 5 years for the Options to kick in, the "Serial CEO", would be gone. Long term growth and stability would take center stage, instead of this mindset of "Short Term" gains.

A perfect example of this is the guy that went to Sears about 30 years ago, fired all the full timers, replaced them with part timers with no benefits. Since this dramatically cut Sears cost of doing business Profits boomed. Before long, he took MASSIVE bonuses and then left just a few years later, JUST as the effects started being felt that eventually drove the company into bankruptcy. What effects you say? Do you think that Part timers are as dedicated to the long term growth and stability to the Company as are full timers, some of which had been at the company for decades? Of course not Can you imagine going over to Mobil, GE or Boeing and saying, "I'm going to cut all the full timers and hire a bunch of part timers and the company's going to make more money". The board would think you're a nut job and fire you.

This same idiot was then hired by Home Depot, where he tried to do the same thing, cut full timers, cut training budgets, took massive bonuses, then left just as Home Depot stock took a 10 years slide. The problem with these kinds of CEO's is that while there's an IMMEDIATE up-tick to the stock price, because of improved profitability, over the long term, they lose their best employees and end up with a sinking ship.

I have no problem with massive compensation to the top guns that run these companies, as long as it is DIRECTLY tied to their performance as CEO's. Take a look at the banks, still getting multi-million dollar bonuses after they had US bail them out, that's sickening. Can you imagine if Paton Manning, who's getting 14 Million a year, decided to get Fat and Lazy and didn't perform as well as he has? He'd be CUT. His 14M a year GONE.

Why do these CEO's continue to get paid MASSIVE salaries from public companies, Government sponsored Enterprises (GSE's) like Fannie Mae and Freddie Mac, publicly Traded AND publicly funded companies like these top banks, Monopolies like the Utilities and so on. It's insane, and it's definitely NOT capitalism. It's Crony Capitalism, it's "Who do you know". It's almost a Reverse Socialism, where the Super Rich are supported by the little guy.

While I still believe in a very limited government, I do believe that common sense regulations should be in place to protect Wall Street and the public sector from the excessive gluttony that we've seen when it comes to CEO pay. The reason I say this is because it's gotten to the point to where their pay has ABSOLUTELY NOTHING to do with the level of performance at the companies.

Proposals like Obama's 500K cap on pay means absolutely nothing because all the board needs to do is give the CEO's additional pay in the form of direct Stocks, (not stock options like my plan would propose). If the board was hell bent on giving the CEO 5 Million bucks, even if the stock went all the way down to $1.00, they would simply give him 5 million shares.

In the mean time, the Government continues their attack on the true hero of the American Economy, the small business owner. God Forbid, any of these guys make over a Million, we have to tax them to death. These guys aren't taking any public money, they're not taking public stocks and grinding them down to nothing. They're not ruining the Pension funds of America, yet they're made out to be the bad guy. Those "Evil People" over there making more than 250K a year. While we're being RAPED by the bank CEO's.

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