Obama said yesterday that he knows how much is too much executive pay - he does not begrudge anyone making an honest killing - just make sure its not some undisclosed too big for his tastes. The more he and his government regime keep harping on the issue the more their lack of real world experience shows.
Geoff Colvin of Fortune just wrote a great little article that explains that this current proxy silly season where the media and politicians think they win polling points by showing outrage about executive pay disclosed in this spring's proxies, should really be about "how" executives get paid, not "how much".
ValueAligned companies get paid for reaching for "economic profit" not accounting earnings.
They're incentivizing managers to do stupid things
A large majority of companies base their long-term and short-term incentive payouts -- which often form the bulk of executive comp -- on the company's reported income, earnings per share, total shareholder return, and various other ratios, according to a new analysis by the James F. Reda compensation consulting firm. Sounds sensible, but it isn't.
Research has long shown that reported earnings and EPS correlate poorly with what shareholders actually care about -- the value of their company. In addition, earnings, EPS, and return ratios are easy for managers to manipulate through all kinds of arbitrary decisions about reserves, write-offs, taxes, pension assumptions, and other factors. Even total shareholder return can be gamed by paying out a big dividend, potentially destroying value.
Much better to incentivize managers with an economic profit target (operating profit minus a capital charge), as Best Buy (BBY, Fortune 500), Deere (DE, Fortune 500), and many other top performers do. Research shows it correlates far better with stock value, and as Best Buy chairman Richard Schulze says, it "focuses management to think like shareholders."
via money.cnn.com
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