Waxman just wants to know how much is big

Posted by Marc Hodak on March 8, 2008 under Executive compensation | 3 Comments to Read

Henry Waxman, Chairman of the House Oversight and Government Reform Committee, held hearings yesterday on executive compensation. The Wall Street Journal predicted:

It should make for good political theater. For added effect, Mr. Waxman has invited testimony from corporate-governance experts and Brenda Lawrence, the mayor of Southfield, Mich., a middle-class community that has been affected by the housing crisis.

(HT: Larry Ribstein)

Here are my qualms about Congress trying to substitute their judgment for that of directors on this issue:

1) Their analysis is post-hoc. The competition for talent in the executive suite is fierce–something Henry Waxman doesn’t really believe. The competition for returns in the corporate market is extremely fierce, something Henry Waxman doesn’t have a clue about. About ten percent of executives that were thought highly competent when they were hired will end up in the bottom ten percent of corporate returns, even on a sector-by-sector basis. “Why did the board pay these people so much money when they plainly were such poor CEOs?”

2) Even post-hoc, Congress is incapable of distinguishing perverse incentives from decent ones. It’s not that they’re stupid. I have quizzed institutional shareholders, securities analysts, corporate officers, even other compensation consultants on the incentive effects of certain compensation structures, and they often come to the wrong conclusion. “You mean that regular grants of restricted stock actually create an incentive to tank the stock price?” Could happen. I’m skeptical that our national Chamber of Unintended Consequences will come to the right conclusions.

3) I pity Compensation Committee members. Yea, there are a few who are careless, maybe even negligent. I’ve read about them, and can jump to conclusions as fast as any reader. And Nell is right that most compensation committee members don’t quite know what they’re doing in structuring packages, but that’s not their fault. We don’t generally hire incentive experts to the board, and their fiduciary responsibility demands that they apply incentive mechanisms to their packages, and incentives are tricky (see 2). Nevertheless, the directors I’ve personally worked with, to a man (or woman), have been highly conscientious and, if anything, wary of overpaying their CEO to the point of occasionally hurting their chances of retaining a very good person.

Personally, I believe that the answers to the ‘problem’ to exec comp are far more subtle than a congress-critter can manage.

Link here on “where does this committee the authority to investigate stuff like this?”