“Stock salary”

Posted by Marc Hodak on October 29, 2009 under Executive compensation | Be the First to Comment

Every now and then, and outsider can see something that the insiders overlooked.  Kenneth Feinberg, Treasury’s “pay czar” replaced cash salaries with something he’s calling “stock salaries,” which is shares of the company that vest immediately, but is paid out over three years.  This is a kind of restricted stock where the restrictions are on the payout rather than the vesting.  There are two nominal benefits to trading cash salary for this kind of “stock salary”:  to give the manager an incentive to get the stock price going up, and to stick around to make sure their efforts result in sustainable improvements.

I give kudos to Feinberg for equating stock and cash from the perspective of a salary equivalent.  Salary is referred to as “fixed pay” since it represent the guaranteed, time-based portion of managerial income.  Most people in the compensation industry view stock as “variable” compensation because its value varies over time.  I believe it’s more realistic to view stock as somewhere in between.  It’s “fixed” insofar as there is a guaranteed value on the date it is granted, and it’s “variable” insofar as it does, indeed, vary in a manner that is arguably, somewhat influenced by managerial effort.

My view is that stock is more salary-like than bonus-like, even with the restrictions. The problem with “stock salary” is that the restrictions simply make the stock grant less valuable.  The easy remedy is to replace stock for cash with a higher value of stock than is surrendered in cash, and Feinberg appears to have done something like this for many of the managers.  He was able to get his headline that he “cut salary by 90%,” while giving managers a risk-adjusted salary-equivalent to try to keep the good ones around.

I think, however, that it’s a mistake to think that stock has any incentive effect on managers, besides the incentive to pray it goes up.  Most managers simply cannot relate their day-to-day decisions and activities to the overall company stock price.  It’s kind of like expecting them to use a globe to navigate between nearby towns.

If Feinberg fails to attract or keep talented people at the Sorry Seven, which I believe is inevitable, it will be partly because the political constraints under which he is working will prevent him from meeting the market for real talent, which always has exceptional options to choose from.  The more important driver, though, will be that talented managers seeking to implement creative solutions to difficult problems simply cannot work in a politicized, bureaucratic environment, which already explains GM and Citibank.  It’s doubtful that the Federal government will be the catalyst to change that.