John Cassidy has got me thinking on executive pay. Cassidy is angry at the sums paid to CEOs, and he’s urging us all to "go ahead and get mad" in an attempt to curb the worst excesses. It’s not the biggest issue facing corporate America right now, but that’s no reason not to address it.
Cassidy zeroes in on CEOs’ contracts as a large part of the problem: they basically make it impossible for CEOs to be fired, which means that when they’re replaced they generally leave with an extremely generous departure package.
Cassidy uses Stan O’Neal as his Exhibit A: he was allowed to leave with $130 million in unvested options, because the board couldn’t fire him for cause. I find this example not entirely compelling, because those options were essentially past pay. The board might have had reason to want to unpay him some of that money, but clawing back previously-awarded compensation is a pretty drastic thing to do.
Here’s my bright idea: rather than awarding options, boards should extend enormous low-interest or even interest-free loans to their CEOs, on the condition that all the money be used to buy the company’s stock. The fiction of options, of course, is that they have no value if they’re awarded with a strike price where the market price for the stock is – that’s how companies find it so easy to award so many of them. My idea also costs the company very little, but it does give the CEO much more downside exposure than any options grant does.
If Stan O’Neal had received an interest-free loan to buy Merrill stock on an annual basis, people wouldn’t worry so much about how much he got paid each year or how difficult his contract made it to fire him. When he left, he’d have to repay the loan, and the value of that stock wouldn’t come close to covering the amount of money he needed to do that.
Of course, it wouldn’t work out like that. As Cassidy notes, boards have been well and truly captured by their CEOs, and so they’d probably end up just forgiving the loan instead. But at least that way, when they were hauled up before Congress, they couldn’t say, as the head of Merrill’s compensation committee did, that they had no choice in the matter.