Roger Ehrenberg has a good post on the comp plans at the top of bailed-out banks. He takes Lehman's Fuld as an example:
have been holding a portfolio of these 10 year maturity/5 year
cliff-vesting options, meaning that he has 5 years of stock
compensation cumulatively tied up in the company at all times. Now
consider if this total compensation was weighted, say, 80-90% in these
options, such that he got enough cash to live very, very well, but that
almost all of his net worth was tied up in the stock. Tied up for 5
years. All the time. It is very hard to keep a fraud going for 5 years,
to fool the market for 5 years. So Dick, in my example, would have lost
almost everything when Lehman went down. Which is as it should be.
Highly compensated traders should be paid the same way, specifically to
avoid the kind of "swing for the fences" attitudes that permeated Wall
Street and amplified risk to reckless levels. All in the name of
current year compensation. This has been and will continue to be a
recipe for disaster unless a wholesale revamping of executive and
highly-compensated employee compensation is undertaken.
I agree with Roger for the most part. However, at the end of the day, this is a supply and demand driven negotiation, where outsiders trying to regulate (i.e. mandate that banks structure pay packages a certain way) would be a disaster. Typically, you have a board trying to hire the right CEO who will try maximize shareholder value.
Now imagine you're on the board of a bank with a $5b market cap. You have two candidates you're considering for the CEO job and you feel one is a better fit. You have to determine what it will take to bring on the two candidates and make a cost/potential benefit decision. The total package cost you end up negotiating with both end up at similar ranges, but the candidate that seems like the better fit will not accept your fully-aligned comp plan (such as the one Roger proposes). What do you do?
Given the potential impact of the right person on the market cap of the company (in this case, a 10% difference in performance would result in PV $500m of shareholder value), I think it would be short-sighted to force the fully-aligned package. I would imagine many people had frowned on Jack Welch's package when he took the helm at GE, and there would have been plenty of similarly qualified managers who would have taken the role at a lower cost, but at the en d of the day Welch's enormous package looks like a rounding error in the shareholder value created at GE over his tenure.
I don't mean I am happy with the money made by the management at failed banks. It's just that compensation is a complicated issue and free markets are a bitch. 🙂