Wednesday, October 25, 2006
The Truth about Executive Compensation
I am getting a little off track, but this is something I have wanted to blog about for a long time. Thanks to Keith over at Housing Panic, "The Housing Bubble Blog with Attitude" I have been inspired to write about this subject. Here is the link to his post and to one of my favorite blogs:
His post is in response to the Countrywide CEO Mozilo, who was compensated $160 mil last year. Now I am no friend of the Real Estate Industrial Complex (REIC). I am almost positive there will be Enron like hearings in the near future in regards to fradulent real estate practices. My post however is in regards to all executive compensation and how populist regulation can have the opposite effect. The problem with over compensation is a result of the proliferation of stock options. However this is only a symptom of the real disease which was the cause and effect of liberal "tinkering". The main source of the problem is a law that was passed by President Clinton & his Democratic congress in 1993. As with most liberal policy it sounds good on the surface and means well, but of course had the opposite effect. Did you know that currently companies are prohibitted from deducting any salary of $1 mil or more? Well in 1993 congress passed the law, which is now part of section 162(m) of Internal Revenue Code, in response to the public uproar of compensation paid to top execs. This effectively created a boom of stock options for execs & employees (mostly execs). Plus congress exempted incentive-based pay from this law and the IRS ruled that option grants was incentive-based pay. This is why there is more excessive compensation than ever because companies can pay them for "free", by just issuing out more stock. Most executive compensation is well over 80% stock options. Big fund companies and fellow executive stockholders rarely complain about these options. Now if the liberals didn't tinker & regulate then most of the compensation would be in the form of salary and be put on the balance sheet for everyone to see. Leave it to the government to screw it up.
The countrywide CEO is a prime example of what is wrong with the system. Pump up the stock or ride a bubble and then cash out and let some other poor sucker deal with it. Coincidence with the internet boom, you bet. That is why congress needs to abolish the law on executive compensation. It seems ass backwards, but it's the obvious solution.