Shareholders are the best Regulators of Executive Compensation

As governments wrestle with what they should do about capping excessive pay and bonuses to executives it seems clear to me that they will not be able to get it right.

There are too many variables. If the US sets tough caps on compensation then there may be a flight of financial wizards to other countries where they don’t impose such restrictions. That’s the commonly head view anyway, which has never been tested.

If the G20 have a consensus you can bet it will be just like OPEC. They will agree in principle and then find some back-door ways to pay for the wizards they want. It’s called cheating and we all know the financial industry and governments are professionals at it.

So what do you do to ensure salaries and bonuses are in line with “normal” expectations of the shareholders, who are the legal owners of the company.

In my view it is simple 🙂

Governments should leave it to the owners, the shareholders  to decide the compensation of the managers of their companies. I’m not talking about fund managers here who are only the custodian of the real shareholders stock.

It has to be every individual shareholder and they should all get to vote if they want to on the compensation packages. They should vote on the executives, the board and the high fliers compensation packages.

I’ve seen it written that the shareholders cannot be trusted to determine salary and bonuses. That’s just plain rude. It seems to me if I own the company it is my right to decide how much I want to pay someone. It’s up to the manager to present his pay case in terms I can understand.

Supreme Court to Hear Case on Executive Pay

Even if mutual fund investors could be counted on to act rationally, the economists’ brief said, they do not have ready access to the information they need to make sensible choices.”

So instead we have the stupid case of the mutual fund managers siding with the board of directors to ramp up executive pay and thus board member pay too, often with them being a board member. So that’s acting rationally I suppose. – No it’s pure greed and self-interest.

How many times do you read boards have paid their executives for poor performance and rationalised it on the basis that “one-of” external forces caused the bad result? Isn’t that for shareholders to decide?

It’s okay for mangers to get it all wrong and wreck the company. But the owners don’t have that right.

Every company is different. Different industries support different pay packages. What shareholders believe is okay in one compnay may not be okay in another. It should be their right to choose.

Shareholders will show responsibility and common sense. Thousands of shareholders voting together will produce a better decision than a few “mates” of the executive sitting in a room agreeing compensation for executives that may ultimately affect their own remuneration.

Shareholders are not emotionally involved with the executives. If an executive is doing a lousy job in their eyes they should cut their compensation until they lift their game or leave the company.

If shareholders are not objective and rational they won’t be able to find an executive to do the job, or may only attract poor ones. It is their company and it should be their right to select their managers.

The great thing about shareholders voting is that many new up-and-coming executives may get a chance to show their leadership and stop the merry-go-around of the same old CEOs moving from one company to another and moving on after mediocre performance and picking up millions of dollars in contract cancellation fees – pay-to-leave money. Even when they do a lousy job they walk away well paid for such failure. This is just plain wrong.

Also many shareholders will take the time to scrutinise any applications for executive positions and vet them. So it could well stop the recycling of poorly performing managers going from one compney to another often protected by their executive mates.

This approach couldl kill the old-boy network and we may all find there is some real talent out there and at reasonable prices too.

As with any section of the population most managers are mediocre at best and many only shine during the good times. As with all thing there are very few really talented people out there. They either catch an economic wave or get lucky. Very few can create real wealth within a company by their own efforts and through their own mind.

You can be sure that anyone who does perform will be well rewarded by a vote from the shareholders.

Shareholders voting on the compensation for managers and executives will help put the fear of shareholders in the minds of those entrusted with their company. Each year they will know who they are working for. No more cooking the books to make the figures look good. Some of the shareholders will catch them out and tell the others. There will be no hiding place.

Shareholders voting on the compensation of executives might just have helped bring some sanity into the financial companies well before the financial crisis. It might even have helped avoid it. Would you as a shareholder vote to pay someone $100Mn in bonuses? I know I just would not do that. And wouldn’t it tell you something is out-of-wack when the financial wizards think it is okay?

Shareholders tend to have their feet on the ground most of the time.

Remember the success of someone who is paid a $100Mn bonus is built on the massive financial investment in computers, buildings, research and other people that made the product these financial wizards were able to sell. And it’s all paid for by the shareholders.

If such a person started their own company and fully funded it themselves to the same level and was so successful they could pay themselves $100Mn as a bonus, I have no problem with that. But if they could not possible do that without the backing of millions of dollars invested in corporate tools and staff by shareholders I do not believe they should be paid such high bonuses.

If the US legislated to ensure shareholders voted on executive salaries and bonuses, the rest of the G20 would follow I’m sure.

So let the shareholders take back the companies they own. It’s the best form of regulation there is.

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