Sunlona.com

Corporate executive compensation has been a topic of discussion from the last few decades in the academic and research community. Corporations have ignored fair compensation policy for executives and upper level management with the argument that the over compensation is necessary to attract experienced and knowledgeable managers. The problem with this old argument is that it ignores the fact that corporate value is created by a team which includes employees, board of directors, mangers, executives, suppliers, lenders, stockholders, and other stakeholders. For years corporate board and management were able to justify and keep the corporate compensations of executive and upper level management out of the public discussion. The financial crisis of the financial service and the automobile industry, and government bailout of financial institutions and the auto industry with the tax payer’s dollar has brought the corporate compensation policy into the public domain. Government has invested in the company and the question is whether it is right for government to suggest or dictate the corporate compensation policy for its executive. Let’s make one thing clear, the government is similar to the corporation, and its stockholder is the citizens of the country who have invested in the government through tax payments. Now, if corporation A invests in corporation B, the question is whether corporation A has a right to monitor the activities including management compensation of corporation B? The answer is yes, they have the right to do so.  The government bailout has brought the corporate compensation policy into public domain because of the tax payers’ investment. It is the time for SEC to require companies to share information on corporate compensation policies in a simple and clear fashion. A full and clear disclosure of the compensation is needed. No law or accounting or non accounting rule should allow the management to hide the compensation payments from the public.

The corporate compensation is a business decision and decision should be based on the business performance. A corporation is a legal entity and the owners of the company are stockholder. The board of directors are elected by the stockholders and it is their duty to oversee the interest of the stockholders. The problem with the corporate board is most of the board members are rubber stamps of the management. They are not active participants in the corporate governance process. The first step is to streamline the board of director’s selection process with requirements for the board to make sure that they have a business education, are familiar with the business and industry, and are continuing the professional development.  Second, there should be a limit to how many companies’ boards a member can participate at one time. Third, compensation for board of directors should be based on corporate governance. That means small amount of annual compensation plus stock compensation based on the long-term performance of the company. If we address the role of the board of directors, next we will be able to focus on the management compensation. The management compensation should be based on a simple relationship between sales, earnings, and returns to the stockholders. The stockholders are the owners of the company and it is their money that is being used to generate profits. The stockholders have a right to this information in simple and clear fashion. The company needs to publish every quarter and annually how much in salaries, and bonuses were paid to the executives. Also, the company should present the relationship between the corporate compensation of executives, company’s revenues, earnings, capital utilization, and employee compensation.

Bloger@Sunlona.com