FDIC may take on Executive Pay

The headline, FDIC eyes linking levies to bank pay, is yet another media sound byte which might be yet another PR stunt with no action.

US banks’ contributions to a multi-billion dollar fund that insures depositors’ savings could be linked to regulators’ assessment of bank pay plans, under preliminary discussions being held by top banking watchdogs.

So, there is no commitment or comment. At least the FDIC is considering such a move, while Congress does nothing.

Meanwhile, Michael J. Cooper, Huseyin Gulen and Raghavendra Rau published a new study, Performance for pay? The relationship between CEO incentive compensation and future stock price performance, which disproves a correlation between executive incentives and company performance. It's so bad, it's almost a negative correlation instead!

We find evidence that industry and size adjusted CEO pay is negatively related to future shareholder wealth changes for periods up to five years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next five years of approximately -13%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results are consistent with high-pay induced CEO overconfidence and investor overreaction towards firms with high paid CEOs.

Interesting to say the least! So, let's get this right, when one has those CEOs with reasonable and low end compensation, the company performs well, yet those at the top of the pay scale...their corresponding companies loose money.

The average yearly loss in abnormal shareholder wealth for firms in the top decile of pay is $2.39 billion, after paying out an average of $22.7 million in total CEO compensation. The performance worsens significantly over time.

While the paper continues with a host of theories, one can also conclude that executive compensation is now inversely related to shareholders interests.

So, why can we not get reforms on executive pay?

Below is a post written a year ago, Corporate Citizen, an oxymoron, talking about the divergence in corporations interests from the national interest. Now we have a situation where even the corporations interest is diverging from the executive interest.

I suggest reading the entire paper and note, all of the research and study on executive compensation within Academic circles and not a lick of action anywhere.

PDF icon CEOperformance122509.pdf240.38 KB




Time to hold CEO's and their crony boards accountable with changes in the law to empower shareholders. Good for FDIC. Some pension plans should join in.

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Ha. Ha. Ha.

As long as our corporate masters throw us a bone now and then we will be OK. Corporate governance and proxy system favors entrenched executive management.

Here is the thing either we continue the notion that markets can self-correct and do nothing or government steps in via SEC regulations to do something to open up access to proxy statement and nomination of board members. There is NO middle ground or 'third way' here. Things have gotten so bad that half-ass measures like the ones we are seeing now will only make things worse.

RebelCapitalist.com - Financial Information for the Rest of Us.

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"Pay Czar" admits he has no real power

We kind of have known this, that the "Pay Czar" was just for show and no real action on executive compensation could really happen, but he's going to be interviewed this weekend on Bloomberg.

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