The Executive Pay Distraction

Executive pay is a fundamental, long-term issue for public companies, as well as for mutual fund managers who often lead the chorus for "reforming the other guy's pay." These issues can't be dealt with as part of the banking and credit crisis. Unfortunately, hand wringing about bonuses at AIG comes after the horse has left the barn, and it is a diversion from the main issue.

So, we now know that Federal largesse has gone to make a limited number of contract counter parties whole, one of which is Goldman, Sachs, whose former official Henry Paulson pressed for this aid package in the first place. To use the poker term, the Fed and the Treasury are now "all in" on AIG, with diminishing hope of taxpayer recoveries and increasing risk. We as taxpayers cannot and should not shoulder all the counterparty risk in the AIG portfolio. I don't understand what we are trying to do at this point, and the market doesn't either.

The Federal government has become a significant "owner" of AIG, yet it has chosen not to act like an owner, but like a silent partner. Owners take ownership, participate in business and oversight decisions, and demand accountability. Since the Feds has to do none of these, it's not at all surprising that management were untrammelled in paying themselves for being irresponsible. It's probably too late to go back and place a Federal director on the board who reports directly to Congress or the executive branch. It is a shame.

The bonus issues are hard to understand, because bonuses are typically paid on mixture of corporate and personal objectives. What kind of objectives could have led to some the reported payouts? A corporate objective of maintaining a non-zero share price? A corporate objective of taking more Federal money? Unfortunately too, the proxies will come out long after our Twitter attention spans have forgotten about these issues. Perhaps the companies receiving the handouts should have to 8-K their real time, current compensation plans on their websites. Now, that would be transparent. When someone like Dick Kovacevich refers publicly to Fed and Treasury stress tests as "asinine," you know that there is trouble in Dodge.