Author: Dan Keeler
An investment in openness

There can be few things in the corporate world that are more complex, contentious and, frankly, confusing than the issue of executive compensation. It is into this confounding and controversial area that we wade in this month’s cover story. The timing is no coincidence: With expectations running high that 2006 will turn out to be another record year for M&A;, the chances are that multi-million-dollar payouts to top executives of takeover targets will making headlines once again.

While the details of the payouts may be new, the premise of the headlines is likely to be anything but. Every so often a story emerges that triggers a wave of condemnation for the ever-increasing size of payouts to senior corporate managers. It usually follows the revelation that a departing executive is leaving a company with his pockets stuffed with cash. This year it is more likely to focus on accusations that an executive primed a company for takeover specifically so they could get their hands on a lucrative golden parachute.

By and large the arguments trotted out by supporters and critics alike are much the same. Proponents of mega-payouts will always say they encourage executives to act in the shareholders’ best interests. Critics will invariably point out that the managers’ and shareholders’ best interests are very often quite different. Unfortunately, both sides of the argument are flawed. Rare is the manager who can honestly say they act only for the shareholders, disregarding his or her own personal interests. Similarly, though, it’s hard to find fault with the assertion that a manager who is promised a rich reward for doing their job well will try to do just that. If that reward is in the form of shares in the company, won’t that manager do their utmost to ensure those shares become more valuable?

The problems arise in the details. Some compensation schemes are so complex that it is almost impossible for investors or regulators to assess their fairness or appropriateness. Others may simply be badly designed, offering the executive too many opportunities for self-enrichment and too few incentives to enrich the company.

The SEC’s efforts to force companies to calculate and reveal the true value of their top executives’ compensation packages (see page 20) are laudable. If successful, the new rules should ensure investors have access to much more information than ever before. But legislation is not enough. Corporations must be more open about the lengths to which they are going to attract and retain their key top executives. After all, if the company is confident the executive is worth the investment, why keep it a secret?

Until next month, Dan Keeler