I'm Alright Jack; Keep Your Hands Off My Stack
Today, Goldman Sachs CEO, Lloyd Blankfine, and 6 other top executives decided to eschew their 2008 bonuses. Perhaps it was for noble reasons, or perhaps it was because they wanted to avoid the inevitable backlash. Whatever the rationale, it points to a bigger issue—why did they qualify for enormous bonuses in this environment?
Executive compensation is often misaligned with the realities of company performance. This is a complex and nuanced subject for which there is no easy solution. However, it's pretty clear that compensation, if the imbalances are to be mitigated, should be linked primarily to variables that are largely under company supervision. Those variables can include things such as top line revenue, bottom line profitability, expense control, etc. Another factor might even be a relative comparison to competitor performance. Such a comparison enables performance outside the mean to be rewarded or punished. It is possible to be an effective manager in a hellaciously difficult economic climate in which numbers may be down substantially, but not as catastrophically as might be the case with weaker management. Many argue that Goldman Sachs is such an example.
One compensation scheme that should not be used, in my estimation, is where share price is the principal variable. Share price is frequently over-susceptible to broader market or industry segment movements, whether they be up or down. It often does not reflect actual underlying operational strength or weakness. I do think it's appropriate to include share price among a group of more controllable variables when defining a compensation plan, because share price can be a gauge of investor confidence. Management should not be isolated from that measure.
One thing we should be learning from this unprecedented time is that this is not a black or white issue. If compensation is to be regulated, it must be done with the utmost care. Absolute and relative performance measures, in combination, probably produce the best result. In some cases, though, neither are ideal. Of course, common sense is the safety net when all else fails.
Executive compensation is often misaligned with the realities of company performance. This is a complex and nuanced subject for which there is no easy solution. However, it's pretty clear that compensation, if the imbalances are to be mitigated, should be linked primarily to variables that are largely under company supervision. Those variables can include things such as top line revenue, bottom line profitability, expense control, etc. Another factor might even be a relative comparison to competitor performance. Such a comparison enables performance outside the mean to be rewarded or punished. It is possible to be an effective manager in a hellaciously difficult economic climate in which numbers may be down substantially, but not as catastrophically as might be the case with weaker management. Many argue that Goldman Sachs is such an example.
One compensation scheme that should not be used, in my estimation, is where share price is the principal variable. Share price is frequently over-susceptible to broader market or industry segment movements, whether they be up or down. It often does not reflect actual underlying operational strength or weakness. I do think it's appropriate to include share price among a group of more controllable variables when defining a compensation plan, because share price can be a gauge of investor confidence. Management should not be isolated from that measure.
One thing we should be learning from this unprecedented time is that this is not a black or white issue. If compensation is to be regulated, it must be done with the utmost care. Absolute and relative performance measures, in combination, probably produce the best result. In some cases, though, neither are ideal. Of course, common sense is the safety net when all else fails.
Comments