Executive pay is part of tone at the top

Confucius acknowledged that corruption existed in government in his time and warned that extravagance leads to insubordination.

In our time, if compensation for executives is based on immediate rewards, it is only natural they will work towards reaping instant gains even if the organization is left to hemorrhage.

And ultimately, that is how setting the tone at the top by paying top executives excessively can lead to fraudulent and corrupt behavior.

If self interest is placed before the interests of the company or country, a conflict of interest arises and plans to increase the long-term value for shareholders are instead replaced by short term budget goals, upon which performance compensation is computed. If top executives fail to take responsibility and ownership, this leads to a breach of trust which could and has on many occasions, turned criminal. Confucius reminds his disciples that in acting on behalf of others, one has always to be loyal to their interests.

A solution suggested by Jeff Ubben in the Wall Street Journal to maximize value for stockholders is by paying CEOs a percentage of the equity value they create above a minimum rate of shareholder return, or "hurdle.”

“Traditional stock options," he said,"both encourage risky behavior and reward CEOs for stock-price increases even if caused by temporary market volatility rather than long-term value creation. But if hurdles are set high enough and required holding periods are long enough, CEOs won't be rewarded for temporary stock-price increases. They will 'own' the long-term outcome of risky investments.”

Endorsing excessive compensation and rewards based on short term gains sends the wrong tone that one is accountable only to oneself and the sense of responsibility is eluded.

But we should all remember Abraham Lincoln's exhortation that “You cannot escape the responsibility of tomorrow by evading it today."

The discussion continues…..

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Dr. Henry Wong Meng Yeong is a contributing editor of the FCPA Blog.

Comments

[Jim Wesberry]

Well said...but why not go ahead and recognize that currently popular stock options and other incentives foment fraud and corruption on the part of executives whose skills are needed doing honorable things, not just getting rich.