Anda di halaman 1dari 3

Comment by: Kumar Pallav Corporate law: Policy Analysis

Reforming Executive Compensation: Simplicity, Transparency and Committing to the Long-term


Author: Sanjai Bhagat and Roberta Romano

An executive compensation reform proposal is required for sustaining long-term shareholder values. This paper reveal in this direction that incentive compensation plans should consist only of restricted stock and options, so that executives cannot sold shares nor the options exercised for a period of at least two to four years after their resignation or last day in office. The present paper makes a first step towards providing as how the widely accepted approach will provide superior incentives for executives to manage firms in investors longer-term interest.

In this comment I intend to focus that how the authors could argue and analyze that this proposal of incentive compensation take the form of only restricted stock and restricted stock options. The goal of this comment will be to support and contrast the views of authors, specifically in the issue of the role these efforts for the public and private companies to mitigate the likelihood of future financial crises.

It is noteworthy that French government had made similar policy to cut golden parachutes for public and private institutions and they believed that will solve the crisis due to down market. I support to the idea of the authors not to totally cut executive compensation and would like to recommend that mandatory holding periods and use of performance vesting for options are also useful policy to consider mitigating the likelihood of future financial crises. This reform proposal will be true for the public sector, in contrast I would like to provide some evidence that should be considered so that authors proposal may become more effective to public and private sector in USA.

Comment by: Kumar Pallav Corporate law: Policy Analysis

In order to provide this view, the best available evidence in this paper provides that incentive compensation did not affect financial institutions (public and private) performance during the financial crisis and therefore it is improbable that they were key contributing factors to the global credit crisis. 1 However as an example for big companies, it is evident that no one complained about the money Bill Gates made at Microsoft and also provided benefit to the shareholders. In terms of theory, corporate policies for the companies should be made in the light of value creation and long term performance. Reason is that the compensation plan is clear indicator of the companys value as an investment. It also reveals what the companys goals are and how confident CEO and board are of the companys future. It helps the company to retain valued employee and encourage CEOs to take risk. The study of Microsoft suggest that before the recession, unrestricted stock grant option yield high returns to shareholders in the biggest private firms. However this may not true in the present global crisis and requires reform to control executive compensation to protect shareholders interest. The companys stock option plan (usually grant at money for executive compensation) is designed to focus attention on stock-values, tax-benefits, agency reasons, reward long-term business success and develop a parallel interest between key employees and shareholders. However re-pricing of options removes all the risk to management and all the benefits to shareholders.2 This shows that the re- pricing is another factor for the paramount importance which may control the executives. At the other end of the spectrum, restricted stocks grant (appealing in down market) is signal to the market that even management does not think that the stock price will go up. For example in the past, Microsoft Corp. considered several compensation plans, including combination of options and restricted stock.3 Equity compensation lead company stock price rise and volatility of stock price increases which generally helps equity but hearts debt (like Apple

See Rudiger Fahlenbrach and Rene Stulz, Bank CEO Incentives and the Credit Crisis, Ohio State University Fischer College of Business Dice Center Working Paper No. 2009-13 (2009). 2 Case in Point: the chairman speaks, R. Monks and N. Minow, Corporate Governance 3 th ed., 2008, p. 268 3 Microsoft Ushers out golden Era of Options, The Wall St. J., July 9,2003

Comment by: Kumar Pallav Corporate law: Policy Analysis

Computers).4General Dynamics ( like IBM) reflected $ 2.3 to $3.5 billion increase during 199193 after the new CEO ( Andres) appointment which suggests the importance of stock-based compensation in the firms characterized by excess capacity: GD downplayed accounting-based bonuses and focused on stock options and restricted stock.5 These facts also support the idea of the authors. For a short-term shareholders point of view, compensation plan may not be considered due to the down market. In theory, generally compensation plan is against the interest of the shareholders. On the other hand due to lack of compensation plan (which gives long term bonding ), role of a weak CEO may discourage to a substantial global investor because CEO may just walk out the door of a company for better job, in the mid of implementing plans. This paper reveal a significant aspect that without curtailing a compensation plan, how this proposal protects the fisc while providing superior incentives for executives to manage corporations in investors longer-term interest.

Study reveals that by giving employees more authority over their work and more of an ownership interest, it makes companies stronger and more productive.6 Natasha Burns and Simi Kedia find, for example, that as a CEOs ownership of restricted stock increases, a company is less likely to be involved in financial misreporting.7 I admire finding in this paper which bring to light and suggest that executives are required to hold restricted shares and options underdiversified. As a result, this would lower the risk-adjusted expected return for the executive. Legislation, stimulus bill, and administration regulations are not an appropriate solution to the problem of compensation providing poor incentives. However, this executive compensation reform proposal with other regulatory efforts will be important in the direction to mitigate the likelihood of future financial crises.
4 5

Brickley, Bhagat and Lease, J. Fin. Econ., 1985. J.Dial and K. Murphy, Incentives, Downsizing and Value Creation at General Dynamics, 37 J. Fin. Econ. 308, 261 (1995). 6 The Pay Problem: Confronting executive excess by David Owen, The New Yorker, Oct 12, 58 (2009). 7 Natasha Burns and Simi Kedia, the Impact of Performance-Based Compensation on Misreporting, 79 J. Fin. Econ. 35, 63 (2006).

Anda mungkin juga menyukai