Tuesday, March 17, 2009

Say on Pay

Wall Street and Main Street alike called for swift and immediate action from the President and Congress to deal with the financial and economic crisis. Now both sides of the street are finding out that swift action sometimes means overlooking some of the details - such as bonus commitments at companies needing rescue to people who might not deserve the extra dough.

Now things are getting messy. The name calling and finger pointing has given way to vicious calls for suicide. Charles Grassley, Senator from Iowa suggested employees of the AIG Financial Products unit who got bonuses should apologize and then commit suicide. If it this was not so utterly offensive on its face, it would be interesting to hear how Grassley justifies suicide given his right-to-life positions. Apparently some lives are more valuable than others and he believes he is in a position to make that judgment.

Perhaps the Senator should consider using his own advice. After all, he is one of the elected officials who failed to exercise due diligence as the bailout and stimulus plans went through the legislative process. Is Grassley not just as negligent as those at AIG who are the targets of his blistering criticism?

No one is served by such reckless talk. We are in short supply of both leadership in Congress and integrity in the board room. Our attention must remain on the questions of fair compensation and what market mechanisms best lead to equitable pay.

Our economy is working through a number of “bubbles” - housing prices, loan securitization, leverage. Add compensation to that list. There has been a much sharper rise in executive compensation relative to wage increases for the rank and file.

In my view, shareholders need to more carefully scrutinize executive compensation in the ordinary course of screening stocks. Inordinate compensation for executives siphons capital away from investment in new products and capacity. As we can see in the financial sector, top-heavy compensation also corrupts decision making and prevents accountability.

In the Crystal Equity Research coverage universe, we have made standard the measurement of executive compensation against sales and earnings. We also note that over the past five years on only two occasions was executive pay questionable. We believe the small cap sector is less prone to egregious compensation practices in part because the smaller companies often do not have enough cash for such excesses.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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