Executive Compensation and the power of $1

The new trend in executive compensation seems to be $1. AIG and the auto CEOs have all agreed to salary cuts to just $1. Of course, the compensation will not really amount to $1, as there is also equity compensation. This $1 compensation news is followed by a new Corporate Library report finding CEO compensation being up 7.5% for 2007. Should we expect any difference for 2008? Not likely. Even John Thain of Merrill Lynch only folded in his request for a $10 million bonus under outside pressure. Apparently, Thain had not been independently dissuaded from his request by the billions in losses Merrill sufferred in 2008.

But now AIG is under new complaints for "retention payments" made to key personnel. AIG has announced payments ranging from $92,500 to $4million to 168 AIG employees. While AIG has agreed to no 2008 bonus payments and no salary increases for 2009 for the top seven officers and no salary increases for the next fifty highest paid execs. Apparently, thirteen of those getting "retention" payments are executive officers of AIG who have agreed to defer payment to them until April 2009, but not to waive this additional compensation. Not surprisingly, some in Congress have complained.

The long-standing problem with executive compensation is that there are so many ways to pay corporate executives. That is, $1 is not really just $1. Compensation comes in so many other ways, from retention payments, bonuses, and perks like corporate jets. My biggest concern with paying these executives just $1 in salary is that their desire for some salary will now correspond to their ability to trigger equity payments. Short terms equity gains for these companies may not be the same thing as long term stability and growth. It would be much better to pay the executives a reasonable salary and forgo the equity. That raises the separate issue of loyalty to company prospects that might arise if executives don't have enough incentives to do their jobs well. Never mind the idea of doing a good job in order to keep one's job. There has been little mention on Capital Hill of the equity compensation that companies getting substantial federal bailouts have promised to senior management. While the stock of these companies may be worth little now, that might not always be the case. A little more talk about continuation of equity programs for these companies should be next.

— JSM