Posted by: brian | March 30, 2009

Reform necessary but unlikely

Chris Farrell suggests A Smarter Way to Set CEO Pay: treat CEOs the same as other employees.

[GASP!] Could something so sensible actually be implemented? I doubt it.

He talks about how nobody gripes about entrepreneurs earning too much money, because they have taken genuine risks, and those who succeed deserve the rewards of that risk-taking. CEOs have no such risk. They get a big reward whether they do their job well or not.

Farrell suggests:

So, here’s the deal: Let’s make CEOs no different from any other employee in most areas. They should face the same risks as everyone else in the organization. They get the compensation package, including health care and pension plan, as everyone else. If the senior management gets the ax, they can do a rollover IRA with their pension and purchase Cobra for health insurance coverage like everyone else. They’ll be better paid than anyone else, but the bulk of their pay will go into stock—and not into stock options that can be backdated. They can start selling stock over a 10-year period after they retire or move on (much like an old partnership structure).

Of course, for the top brass there may be an unaccustomed downside to failure. If the stock tanks like Citigroup, AIG, and other blue-chip penny stocks, they’re poorer. Of course, the details of a plan like this should be fleshed out by much smarter people than me.

Here’s the rub: If corporate directors don’t bring the CEO risk-to-reward ratio in line with other employees and the American entrepreneur, the danger is that Congress will do it for them. That would be a huge mistake. But at that point the big brains that inhabit America’s boardrooms will have no one to blame but themselves.


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