End 'heads-I-win; tails-you-lose' executive compensation


Marketwire reports that The Corporate Library's Editor and Co-Founder, Nell Minow, testified in front of a Congressional committee yesterday. Her message was "that if you make compensation all upside and no downside that will affect the executive's assessment of risk. It will make it clear to him that he can easily offload the risk onto shareholders. It's heads they win, tails we lose."

I agree with her. Unfortunately, she does not make clear what should replace this system. I've posted on this topic before and have proposed that people who make big bucks should keep on making those big bucks -- but with a twist. Instead of giving them all their compensation up front, put the money in an escrow account for, say, 10 years. If the decisions that these highly paid executives make end up paying off for shareholders, pay them the money in the escrow account. If, by contrast, those decisions lose money for shareholders, pay the money in the escrow account to the shareholders.

Nell Minow pointed out that "with executive compensation you get what you pay for and you pay for what you get." My proposal would provide a powerful incentive for decision-makers to take the risks of their decisions into account as well as the short-term benefits of closing a deal. This is a problem that is not limited to executives -- it has to do with anyone who is paid for closing a sale. These people receive a percentage of the deal amount as compensation -- this makes them eager to close big deals fast.

If, instead, decision-makers needed to consider the long-term profitability of their decisions, they would work to maximize their compensation by making decisions that benefited shareholders in the long run. Now all that needs to happen is to convince those wealthy political donors to accept a proposal that cuts into their short-term pay. The politicians who depend on that money will have no problem backing my suggestion.

See how easy that was?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Reader Comments (Page 1 of 1)

Symbol Lookup
IndexesChangePrice
DJIA+6.5112,890.46
NASDAQ+11.372,927.23
S&P 500+1.991,351.95

Last updated: February 10, 2012: 02:53 AM

Hot Stocks

General Electric

19.13-0.11(-0.57)

Alcoa

10.64-0.03(-0.28)

Apple Inc

493.17+16.49(+3.46)

Google Inc 'A'

611.46+1.61(+0.26)

Bank of America

8.18+0.05(+0.62)

Wal-Mart Stores

61.96+0.34(+0.55)

Exxon Mobil Corp

84.88-0.44(-0.52)

Ford

12.69-0.15(-1.17)

Citigroup

33.66-0.57(-1.67)

IBM

193.13+0.18(+0.09)

Yahoo

16.00+0.22(+1.39)

Starbucks

49.20+0.48(+0.99)

Microsoft

30.77+0.11(+0.36)

Home Depot

45.27+0.10(+0.22)

DailyFinance Headlines

Benzinga Headlines

TheFlyOnTheWall.com Headlines

    BioHealth Investor Headlines

    WalletPop Headlines

    DailyFinance BlackBerry App

    My Portfolios

    Track your stocks here!

    Find out why more people track their portfolios on AOL Money & Finance then anywhere else.

    BloggingStocks Partners

    More from AOL Money & Finance

    BioHealth Investor Headlines

    Page Loaded in 1328860429777 ms.