Four reasons to stop Obama's comp cop

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President Obama announced that Kenneth Feinberg will become the nation's "Special Master" for compensation (I call him the comp cop). Feinberg is the fellow who got to decide that the life of a bond trader murdered on 9/11 was worth, say, $6.8 million, while that of a firefighter who perished that day merited 1.8 percent of that amount. Now he gets to step into the emotional firestorm of setting pay for 100 executives whose companies got TARP money.

This is a great way to focus public anger on a single individual for the failure of our system of corporate governance. Before getting into four reasons why I think the comp cop is a bad idea, it is worth pointing out that thanks to a new "say on pay" scheme -- which will give shareholders a non-binding vote on how executives are paid -- there is a chance that the system might improve. That's because one pay consultant thinks it might result in putting "part of their bonuses in escrow for three to five years" -- an idea which I have been writing about for years.

The comp cop's role will be to decide how much those 100 TARP recipients get paid -- and that role will end once the they repay the TARP. So what's wrong with that? Here are four reasons to stop the comp cop:

  • Forces top talent to flee to TARP-free companies. The idea of having a comp cop set pay will drive executives out the door as fast as they can find better paying jobs in companies that are not subject to those pay restrictions. This will leave job openings at TARP companies and filling them with talented people will be tough since in most cases the best people are working in the jobs that pay the most. Second class talent is not what American taxpayers might want to be looking out for their investments.
  • Pushes executives to ignore long-term in a rush to repay TARP. Those who can't find better jobs will have a strong incentive to repay that TARP money as quickly as possible so they can escape the comp cop's claws. This would likely lead the executives to make short term moves to raise cash -- such as selling off the most profitable lines of business -- which might not be in the company's long-term interest.
  • Offers no clear goals. Executive pay is generally tied to how well an executive meets business goals -- such as earning a 15 percent return in excess of the cost of capital invested in the business -- that the CEO and/or board sets for them. The comp cop's job will be to decide on how much to pay executives after the fact -- offering no clear and specific guidance on how he will decide what to pay them. The result is sure to be confusion up and down the corporate ladder.
  • Fails to fix the root problem. The real problem is that the government needs to step in at all. And the reason for that is a deep failure in the so-called corporate governance system (CGS) in which boards act as agents to monitor executive conduct to assure that shareholders benefit. CGS failed because the board is in the CEO's pocket. As a result, boards politely support a failing CEO instead of replacing him or her with a more competent individual. One example is the board's support of CEO Rick Wagoner as he confidently oversaw a 98 percent drop in GM's stock price.

I don't have a problem with executives getting bonuses if their companies are earning a legitimate profit. The simple flash point which the U.S. appears to be missing is that people don't like the idea of giving bonuses to executives who preside over a money losing business. That is the reason that people were angry about paying bonuses from TARP funds. If they need taxpayer money because they are running a money-losing business, they should not get bonuses.

In my view, it does not take a government functionary to fix that problem. The comp cop is like a tiny Band-Aid slapped on a gushing open wound in the middle of the CGS's chest. And by not dealing with the fundamental problems, the cure could be worse than the disease.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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