Essay - Executive Compensation Re: Executive Compensation Once Again, Executive Compensation is...

Executive Compensation

Re: Executive Compensation

***** again, executive compensation is making headlines. This time, it is the executives at banks that received TARP funds. Bonus pools at the nation's ***** totaled $18.4 billion dollars, even as *****se same banks suffered record losses and laid off some 265,000 people ***** a result of their poor fin*****ncial performance (Kopecki & Goldman, 2009). The banks have defended their actions, citing the need to retain top talent. Some industry observers have supported this claim (Oliphant, *****).

They maintain that if ***** banking industry is restricted in terms of its bonuses, its ***** people will take jobs ***** other industries, or in ***** countries where they can earn m*****e money. While there ***** ***** logic to that standpoint, it ultimately fails to demonstrate understanding of why we have ***** in the first place.

When you understand ***** point ***** bonuses and other components of executive compensation, you ***** see ***** today's compensation packages make no sense. As a rule, *****s are simply *****t worth the mammoth ***** *****y receive.

To start from the beginning, a corpor*****tion is owned by its sh*****holders. As so famously put ***** Milton Friedman, the role of manage*****nt is to build shareholder *****alth (Friedman, 1970). The shareholders vote on ***** board ***** the board hires the executives. The board also decides on how to compensate those executives. In recent decades, boards have moved towards compensation schemes that are more incentive based. The idea behind th***** move is ***** boards wanted to motivate CEOs by tying *****eir compensation ***** the ***** ***** the company. The best way to do this, they felt, was to give the CEO an ownership stake in ***** comp*****y.

The trend *****wards equity-***** ***** was supported by the *****s governing its tax treatment. In particular, the rules made options-based compensation affordable. The company recorded as compensation expense ***** cost of the options, not the underlying asset. ***** leverage ***** options provided allowed firms to reward their ***** ***** a much higher level than they would ultimately record on ***** books.

***** 2005, the Financial Accounting Standards Board enacted Statement No. 123-R, which changed the way that equity-based ***** was accounted for. This dramatically increased ***** accounting cost ***** equity-based compensation, forcing many firms to move to alternative methods, such as restricted shares (Balsam, 2007)

Reducing the use of options in executive compensation packages is a ********** point. The problem with options ***** ***** ***** are short-term in nature. ***** means that while *****y tied executive ***** ***** stock performance, they only did so for a short period of time. After the expiry date, options are worthless. So executives became focused on ***** results. This led to some of the accounting scandals in the earlier part ***** ***** decade, such ***** that at WorldCom (English, 2002). This scandal arose because WorldCom executives were compensated ***** large part with *****. *****y capitalized expenses so that the firm would show a profit, thus le*****ving their options in the money.

Since the