Prediction: Resurgence of Options in Executive Compensation

Announced today:

President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money, saying Americans are upset with "executives being rewarded for failure."...

The pay cap would apply to all institutions that have negotiated agreements with the Treasury Department for "exceptional assistance." Those would include AIG, Bank of America and Citi.

Firms that want to pay executives above the $500,000 threshold would have to use stock that could not be sold or liquidated until they pay back the government funds.

I don't get too worked up about this one way or another.  Once the government is a part owner of these companies, it is perfectly reasonable to expect them to dabble with things like compensation policy, and no surprise that focus of such dabbling would fall on whatever particular hobby horses the party in power seem to obsess about.  Which is reason #4097 why government shouldn't be bailing these guys out.

In terms of executive compensation, options have fallen a bit out of favor as executives have sought more of a guaranteed payday, and changing accounting rules and more scrutiny have made that harder to do with options.  The concern is,  of course, stock prices can fall or even go to zero and that part of the compensation package would be worth zero.  Executives are generally happy to take risks but only with other people's money (people who take risks with their own money are called entrepreneurs).

But in this case, most of these companies' stock is at what is likely to be the bottom, and each has the commitment of the government now not to let them go bankrupt, so the danger of stock values going to zero is, well, about zero.   Would you take warrants in a company priced at the market trough and with the US government guaranteeing the floor beneath you?   I can't think of a better time to get equity or option-based compensation, and so expect to see a lot of it in order to circumvent the $500,000 limit.  And a lot of big paydays 5-7 years hence.


  1. Rob:

    Any compensation via stock should be structured so that LONG term management occurs.

    The number of shares that can vest should slide based upon long term performance, or some such mechanism.

  2. Ted:

    While it should go without saying that even a legitimate President's "ordered" $500,000 pay cap is an unenforceable intrusion into the private sector, as if that weren't enough, Obama LACKS EVEN OSTENSIBLE AUTHORITY to issue the order UNTIL HE OVERCOMES "RES IPSA LOQUITUR" BY SUPPLYING HIS LONG FORM BIRTH CERTIFICATE AND PROVING HIS ELIGIBILITY TO BE PRESIDENT UNDER ARTICLE 2 OF THE US CONSTITUTION.

  3. Rolo Tomasi:

    "Executives are generally happy to take risks but only with other people’s money (people who take risks with their own money are called entrepreneurs)."

    Awesome quote.

    @ Ted: Please refer to the "Coyote's Law" in the Past Favorite links to the right.

  4. hoosierman:

    Is it legal? Can a president set aside a contract, negotiated freely, between an individual and a corporation. Aside from that 500k seems down right niggardly. When you pay peanuts you get monkeys.

  5. Mesa Econoguy:

    Obama looks for pay limits, but the Street looks for loopholes

    Most of this will injure lower-compensated employees.

    Nice job, Barack.

  6. James:


    You clearly have no idea what res ipsa loquitur means. It's always amusing when dumb people try give weight to their dumb ideas by using latin.

    ...although, if you were just going for laughs, well done sir.

  7. Joseph Hertzlinger:

    Will expense accounts and three-martini lunches make a comeback?

  8. tank:

    If you do not agree with what President Barack Obama has to say about this subject then you may need a psych evaluation. This subject is extremely frustrating due to the fact that these "Corporate Execs" are the ones to get the country... if not the world.... into this recession. For the last few decades the common man has seen way too many CEO's come into a company... DO NOTHING OF IMPORTANCE... and leave with a multi-million dollar bonus check. Business as Usual will be no more with President Obama. People in powerful positions need to be responsible for their actions. If a man is promoted to an executive position at a billion dollar company he or she should use power to help the company grow. There after if a company grows and is receiving increased profit revenue then in that situation he or she should receive a bonus. However as the system is played right now “executives [are]being rewarded for failure.” This all comes back to the sole question of what people do with powerful positions? Will the tax payer allow these Exec's to get away with highway robbery?... as far as I'm concerned the government bailout winding up in the pockets of these executives has gone on for way too long. Once these "workers" start actually working then they should be rewarded, but until they start producing profits they should get no a penny higher then half a million. Here is a message for all you "powerful" Exec's at AIG, Bank of America and Citi...put your paycheck on hold before you ask the Treasury department (THE TAXPAYERS) for “exceptional assistance.”

  9. David Dzidzikashvili:

    I think it was a right decision to limit CEO salaries at 500K for the companies that are getting taxpayer money. In general I strongly disagree with government intervention in private business matters, but since these companies are utilizing my money and your money and the money that belongs to all Americans, we have the right to limit their payroll, especially after the embarrassing facts of CEOs using bailout money for lavish parties, private jets and unreasonable bonuses. Once they pay us back the money owed, they can have all the bonuses and salaries they want.