The entire executive compensation debate over the past few years boiled itself down into a pretty simplistic talking point, namely, "greedy corporate boards are stealing our money, internalizing the upside and publicizing the downside! shady buggers!!"
So now we get say-on-pay advisory votes for shareholders. And government regulators encouraging banks to stave off bonuses for a few years and institute clawback clauses. Some pretty sad looking balloons.
But incentive-based compensation was supposed to help investors. An increase of stock price helps shareholders. So tying the paydays of corporation leadership to stock price would, in theory, would encourage them to help shareholders.
Obviously it got a bit derailed. The pressure to chase short-term share performance overwhelmed sustainable investment policies that would minimize systemic risk. Thus, the importance of tying compensation to long-term and sustainable performance cannot be underestimated. This modified incentive-based compensation scheme is what our regulators are after now.
Of course, such involves a value judgment about the relative moral standing of long-term investors vs. short-term investors. Short-term investors will make less money vis-a-vis long term investors, under the modified scheme. I'm comfortable with that -- for so many reasons -- but many people won't be.
Regardless, as we untangle ourselves from the compensation crisis, though, a new worrisome movement.
A movement to tie the compensation of mutual fund brokers and advisors to ... mutual fund share performance. Proposed by... mutual fund investors themselves.
Are we doomed to repeat history?
Contemplating the chain reaction of this is scary. mutual funds clamoring for faster, higher profits because of incentive-based compensation, will begin to place more pressure on corporate boards to start doing the same. And thus we find ourselves landing in the same miasma we're wallowing in now.
Is this the outcome of short term memory? Or is it a red herring, supported by financial institutions who make money off both their own mutual funds and broker/advisor services?
Or maybe, just maybe, the problem with risk-taking isn't really about executive compensation. Maybe it has something to with what we think our corporations and pension funds are supposed to be doing in the first instance. Their raison d'etre.
And maybe their raison d'etre doesn't have so much to do with making money for investors. Maybe it's time to start reconsidering the purpose for which we should govern our collective assets.
