Posted by
voice_of_reason on Sunday, October 25, 2009 10:57:04 PM
Most people would agree that it should be the owners (shareholders) of a company who should determine executive compensation. But the question is why do most shareholders seem to be indifferent to this critical process? In reality, it is the Board of Directors (B.O.D.) that sets compensation levels - and at different points in a company's life, the characteristics of the B.O.D. can vary quite a bit.
If you consider the different stages of a typical (public) company's existence:
* Self-funded startup (early stage): founders are usually equity-rich, but cash-poor; B.O.D. has to be well disciplined due to the cash-constraints (or, a rather nasty ka-boom awaits them).
* Venture-backed startup (several rounds of capital): founders are 'crammed down'; VCs gain a significant presence on the B.O.D. and ensure that exec salaries are in line with norms (if not, see ka-boom)
* Public company: founders & early-VCs typically exit; financial discipline on the B.O.D. is driven by 'institutional' types; enter, the 'professional' CEO and other 'charismatic' execs
* Mature public company: B.O.D. is made up of institutional-types PLUS some glamor-types for window-dressing; revolving door for super-CEOs and execs; weirdly competitive pressures, e.g. "nyah, our CEO is bigger-n-badder than your CEO, nyah" ... the B.O.D. and the execs dazzle each other with B.S., back-scratching and fancy double-talk, while the company is usually run by talented mid-level people. Success is a bit of a crap-shoot, but the laws of inertia can be quite helpful. Pass "Go" several times, collecting $$$ each time. Growth often comes via acquisition, not (necessarily) from innovation.
* Very mature public company: holy crapoly .. the company (in its current form) can't deal with mkt pressures ... seek Govt intervention at once. When that (inevitably) does more harm than good, declare the company "too big to fail" and get taken over by the Govt in a quasi-legal fashion that puts the cor-rupt in bank-rupt.
* Extremely mature, public-owned company: Fueled by populist fervor, Govt comes up with an act of genius .. it bravely lowers exec pay after wagging fingers and frowning sternly into adoring TV cameras, saying "Look .. make no mistake ... let me be clear ...". This drives off the show-boat execs but the B.O.D. is now chock-full of dashing young political appointees and union-istas. Execs are hand-picked to be ideologically perfect. The company is now driven as a political fiefdom - banishing any remaining mid-level talent, and keeping it from ever coming back. Profit is a deemed to be a dirty word, and, so, like, old-fashioned, because the Govt-driven goals are much more lofty, e.g. Green Products for a Clean Planet, Jobs for Everyone (and his brother) and the crowd-pleasing "kumbaya my love, kumbaya".
The reality: "oh, it is vonderful, komerade ... ve made dis machine that costs millionz (or iz it billionz? hmm, all I remembers dat it rimes vith Gilliganz), but, you know vhat dis machine do? vy, you ain't seen nuthin, man, she eats garbage and farts steam. De kompany? oh, it iz great! dem smart fellers in Va-shington, dey figger it all out ... dey borrow from the Chineez to pay us ... and ev'body gits free healthcare! hey, wanna see my free gold tooth? jest got it yestyday ..."