Academic

Senator Dodd wants ???a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate.??? The clawback makes sense to me in theory, but how would it work in practice? Take Stan O???Neal, mentioned by Jonathan Lipson in this interesting post on a bankruptcy modeled bailout. O???Neal retired in some disgrace over a year ago, with a $161 million payout. Enough to make a shareholder activist shriek, but $131.4 million of it ???consist[s] of the value of unvested restricted stock and restricted stock units and the in-the-money value of unexercised stock options.??? Merrill Stock was trading at $66.09 around when O???Neal stepped down. It???s trading at 26.53 now. So (if my math???s right) if he didn???t sell his shares are worth in the neighborhood of $52.7 million now. Does he give any of that back? All of it? Or is the clawback just for salary/performance-type bonuses? Isn???t restricted stock supposed to work as a kind of automatic claw-back, to punish short-termist executives by having them suffer if the company does poorly after their watch is up? Has it already worked by cutting almost $80 million off of O???Neal???s payout?

I tend to be a bit of a cynic on executive compensation, given our track record. Limit the tax deductibility of executive salaries to $1 million, unless pay is linked to performance? We???ll just grant a whole lot of stock options. Require more disclosure? That just gives CEOs an idea of how much the other guy is getting, so he can ask for more. Say on pay? Shareholders say OK.