Corporate Governance

Executive Compensation and the Financial Crisis: A Problem In Search of a Solution (Still) (Part 5)

By J Robert Brown Jr.

So, have things changed in the post-crises era?

As the CII Study noted, "the most significant changes were increases in deferred compensation."  It is not, however, an auspicious shift.  Again, according to the Report:

• Since we have already seen that vested stock on Wall Street was subject to more stringent restrictions than virtually anywhere else in the economy, moves since the crisis to defer pay longer and increase the proportion of pay deferred are not promising. Most of the banks appear not to understand that deferring pay over long periods does not by itself link pay to the long-term value growth of the company.

The financial institutions have not put in place provisions that are designed to link a significant portion fo compensation to long-term value growth.  In other words, compensation looks mostly to short term profits, the very approach that significantly contributed to the crisis.

Morever, this approach can be contrasted with practices overseas.  As the Report described:

• In contrast to U.S. banks, non-U.S. financial institutions increased the amount of pay that is deferred, lengthened deferral periods and also increased the amount of pay that is dependent on future performance. And in addition to the more commonly used operational metrics — such as net income, revenue and return on equity — more than one of the non- U.S. financial institutions studied measured long-term performance via an economic profit metric — a metric that requires that the return on capital employed exceeds the cost of employing such capital.

Moreover, as we'll see in subsequent posts, the difference in firm practices in the US and overseas may to some degree reflect difference in regulatory practices.

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Full post as published by The Race to the Bottom on December 16, 2010 (boomark / email).