Ruminations

Blog dedicated primarily to randomly selected news items; comments reflecting personal perceptions

Sunday, December 28, 2008

Oh Dear, That's Tough Times

Who ever heard of such a thing? CEOs having to tighten their money belts? With all the news redolent of a stink of self-availment in industry boardrooms, CEOs departing with a hearty thanks and a hefty bonus, leaving companies' shareholders holding the bag of failure? It's become a universal story. Even while the U.S. Federal Reserve was being empowered to rescue the American financial industry, stories leaked about bonuses flying left, right and centre.

Appreciation for jobs so well done that the Chief Executive officers were being rewarded for management so ill done that they weren't able to foresee the wreckage they were leading their companies into. Or, if they were astute enough to recognize the signs of failure, they kept it close to the vest, and insisted that their signed contracts replete with hefty bonuses were honoured, before they walked away from the mess they left for others to pick up.

We've seen this tired old story of rewarding poor management with whopping departure fees In Canada, at Nortel, at Ontario Hydro, even in the offices of municipalities. Not merely the usual bonuses, but high-priced memberships at private clubs, personal high-end vehicles, golf memberships, even, on some occasions perquisites so out of whack with executive compensation it's mind-boggling: like yachts, full-time nannies and other emoluments to executive privilege.

Compensation for heads of companies and other elite executives have traditionally been different from the level of remuneration ordinary workers could anticipate - to the extent that millionaire row exemplified the princely bonuses casually ladled out to the big names in corporate management; an industry of obeisance to the demi-gods of industry management, who in fact did little to earn their vast salaries, let alone bonuses.

But under the new public scrutiny where tax dollars have been offered by governments anxious to do anything within their discretionary-tax-spending powers to alleviate the collapse of industry, business and financial institutions, a new awareness has finally intruded on the business-as-usual-in-the-boardroom annual payouts. Mostly because it isn't quite business as usual - it's now a panic scene of hanging on by pared fingernails.

Industry critics have long complained about skewed compensation incentives which were endowed regularly as clockwork by firms who tended to reward their elite employees in a premature manner and often for unsustainably risky manoeuvres. Some companies have begun to see the light, and have been shifting over to the more reasonable method of paying out a percentage of what their top earners have contributed to earnings for their companies.

Reasonable, isn't it? Why this has eluded the practical intelligence of most boards of directors is amazing. Frugal with their top-echelon employees they have not been. Mostly because, in the past, they've been anxious to be able to hold out richly palatable contracts to high-end earners who've somehow garnered the reputation of representing excellent management. Outbidding one another to entice the business celebrities of the corporate world to their executive suites.

The huge bonuses generously given to bankers and traders through a scheme where companies initiated these compensations to vie for talented staff in a competitive market truly skewed the system out of all proportion to value. Now the tide is turning, and about time. High-level corporate heads will now have to demonstrate that through their guidance and excellent management, the companies' earnings have accelerated, before those hefty bonuses pad their managers' bank accounts.

Top executives will even be looking at being rewarded with non-liquid junk bonds, mortgage-backed securities and corporate loans, that their past practise has brought into their companies. Anticipating that at some future date their value may return or increase, and they'll offer a reasonable value once more. Another system to be employed may be a type of clawback, where, if failure to produce good results occurs, bonuses can be taken back.

I can just see it now; a company CEO squirrelling away his bonus and defying the company to take it away, taking it to court and insisting their human rights have been attacked. Of course if the bonus funds are placed in an escrow account to be delivered at some future date, should the CEO's activities prove not to have harmed the company by causing financial losses, that's another thing altogether.

Far more cautionary, prudent and up-to-the-moment. If it becomes common practise then executives may have no option but to accept these new provisions in compensatory practise. Their greed and mismanagement, after all, put them in this newly-awkward place to begin with.

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