Corporate Governance

Executive Compensation and the Need for a Permanent Solution

By J. Robert Brown

Ten or so financial institutions have paid back their TARP money.  The most immediate effect is that they have gotten out from underneath the temporary restrictions on compensation.  It seems from reports that some of them (Goldman and Morgan Stanley) have taken advantage of this freedom to go back to their old ways.  As the WSJ reports:

• Based on analysts' earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm's $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007, according to analyst estimates reviewed by The Wall Street Journal.

• Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year, analysts predict. On a per-employee basis, payouts are expected to exceed last year's average of $262,000. Howard Chen, an analyst at Credit Suisse, projects that the company's average pay will come close to the $340,000 paid out by Morgan Stanley in fiscal 2007.

In other words, Delaware doesn't limit compensation and the near destruction of the financial system was not, apparently, enough to permanently create a new compensation ethic.  The area, therefore, needs a legislative fix. Reforming the board is one possibility.  Shareholder access is another.  In addition, however, the standard for determining compensation should not be left to the Delaware courts (where it is no real standard at all) and should, instead, be made a matter of federal law, policed by the federal courts.

Full post as published by The Race to the Bottom on July 09, 2009 (boomark / email).